By the end of this year, all the shares listed on the JSE Securities Exchange will have been moved into a new electronic settlement system called Strate. Once you have submitted your shares for "dematerialisation", they will reappear in another form, in the new electronic registers managed through Strate. We explain how it works.
Faster, cheaper and safer settlement of share trades. That's what Strate (Share Transactions Totally Electronic) promises shareholders when all listed companies are in the new settlement system at the end of this year.
Share trading on the JSE Securities Exchange has been electronic since 1996. But settlement of trades - the process of transferring ownership and money when shares are bought and sold - is still paper-based.
Time-honoured or old-fashioned, depending on your point of view, the present settlement system is based on the use of paper share certificates (called scrip). When you sell a share, your stockbroker must send your scrip, with a signed transfer deed, to the transfer secretary of the company in which you are a shareholder. The secretary must remove your name from the share register, replace it with the new owner's name and then issue a new certificate to the new owner. The new owner must send you a cheque.
Settlement can take up to nine days.
Strate will change all that. Once all shares have been moved into the Strate system, paper scrip will be a thing of the past. Your name as owner of your shares will be entered into an electronic register and when you sell your shares, transfer of ownership and of cash will take place simultaneously. At first glance, this might look scary: swapping the reassuring piece of paper that proves you own shares for an electronic entry in a statement. How do you know the shares really exist in your name?
In the same way you know the money is really there when you get a statement from your bank showing your salary has been paid into your account, Monica Singer, Strate executive, says. You do not need to collect bank notes and coins in an envelope or a cheque from your employer; the item on your bank statement is proof enough that you have been paid.
In any case, whether shareholders like it or or not, Strate is here to stay. Starting with gold mining share Harmony in 1999, a few pilot shares have already been successfully moved into the Strate system. From March this year until December, shares in all the other listed companies will be moved into Strate.
A register of all share ownership will be kept in the new Central Securities Depository (CSD). Sub-registers will be kept by Central Securities Depository Participants (CSDPs) linked electronically within the Strate network. So far, eight CSDPs have been approved by Strate (see list at the end of this article); all are major institutions that meet Strate's strict requirements. Your record of share ownership will be kept electronically in the sub-register of one of these CSDPs.
You can choose either to use a stockbroker (who will appoint a CSDP) or to go directly to the CSDP of your choice. In either case, you will be required to complete a client mandate, which will allow you to define more closely the kind of relationship you choose to conduct with your stockbroker or CSDP. All share information as well as some details about you will be captured in digital format with the CSDP or stockbroker of your choice who will act as your agent.
It is up to you to say in your mandate how much control you want the CSDP or broker to have over your portfolio: Do you want to make decisions about trading yourself, or not? Do you want to respond to company offers - rights issues, scrip dividends and so on - or do you prefer to leave these decisions to your CSDP or broker? Do you want to receive all company information or not?
Stockbrokers are not CSDPs and will not be able to keep sub-registers of shares. But you can leave your shares and cash in the custody of your stockbroker and the broker will keep an account at a CSDP in which your share ownership will be recorded.
The broker will communicate electronically with the CSDPs using an international network called Swift (Society for Worldwide Inter-bank Financial Telecommunications) - the secure network banks use to communicate worldwide.
If you appoint a stockbroker as your agent, you will get your share statements from your stockbroker.
The JSE has drawn up criteria with which stockbrokers must comply to be able to hold shares for clients in the Strate system, including capital requirements and accounting requirements so that investors can be confident that the brokers holding their assets are financially sound.
Alternatively, you can open an account directly with a CSDP, handing over your share certificates and dealing with your stockbroker only when you want to trade. In that case, you must provide your stockbroker with details of your CSDP share account. You will receive share statements directly from your CSDP.
At Mercantile Bank, you can choose whether you want your shares held in your own name or in a nominee account of Mercantile Bank. But Mercantile is the only CSDP prepared to keep "own name" accounts; all the other CSDPs will keep your shares in a nominee account, although this will not deprive you in any way of your rights as a shareholder, Singer says.
When you buy or sell shares, cash and shares move between the buyer's and seller's CSDPs and the electronic records are updated immediately. For instance, when you sell shares:
* You give your selling order to your broker;
* Your broker sells your shares through the electronic Johannesburg Equities Trading System (JET);
* Strate tells the buyer's bank and both CSDPs that the deal is done;
* Money moves between the buyer's bank and your bank; shares move between your CSDP account and the buyer's; and
* You receive your statement from your CSDP or broker.
The introduction of the electronic trading system on the JSE four years ago has meant the number of trades each day has shot up. From 2 933 in February 1995, the average number of trades on the market leaped to about 13 730 in February last year. A daily high of 32 575 deals recorded in 1999 has since been beaten by a daily high of 35 363 deals last year.
The present paper-based settlement system is struggling to keep up with these increased volumes.
"The track record of South African settlements is one of the worst in the world," David Sylvester, chairman of the Shareholders' Association, says. "Less than 55 percent of trades are settled on time."
Singer says that Strate will allow the JSE to compete more effectively with markets all over the world by reducing risk, increasing efficiency and, ultimately, reducing costs.
Currently, share trades are supposed to be settled on the Tuesday of the week following the trade. In practice, this means that settlement can take anything from three days (if you buy or sell shares on a Friday and the deal is settled the following Tuesday) to nine days (if you buy or sell on a Monday and the deal is settled only on the Friday of the following week). Up to 45 percent of settlements due in any one week are still unfinished at the end of the week.
Under Strate, trades will be settled five days after the trade takes place, no matter what the day of the week was when the trade took place. By 2002, Singer says, this period should have been cut to three days and the final target, in 2004, is one day.
Dematerialisation is free.
For new deals, Strate will charge R6 a contract note or broker's note, but this will be phased in, starting with 10 cents on each deal from November 2000, rising to R2 on July 1, R4 on October 1 and R6 from January 1 2002, when all the listed companies are in the system. The charge will appear on your broker's note and will be collected by the broker on behalf of Strate.
The fee of R6 will apply every time you trade on the JSE, whether your shares are held by a stockbroker or by one of the CSDPs.
A further R8 charge will be levied by Strate to CSDPs on transactions on behalf of clients whose shares are held with a CSDP. The charges will not vary with the size of the transaction. In addition, there will be a small charge to brokers and CSDPs for the use of the Swift messaging system.
How much of these charges will be recovered by the brokers and CSDPs from you is still an open question. CSDPs are likely to charge a fee for managing your account, but so far nothing has been said about how much. Some brokers may well decide to absorb the R6 Strate fee themselves, particularly since research commissioned by Strate found that brokers stand to save significant amounts of money through the new system. A study of six brokers by accounting firm KPMG found that the move to electronic settlement could cut brokers' settlement costs per transaction from R81.60 per trade to R35.
The most serious risk in a settlement system, Singer says, is that you do not receive the payment for the shares you sell or that shares you bought are not delivered. Under Strate, this risk will be eliminated by the introduction of a "delivery versus payment" system: the buyer of shares gets title to them against irreversible transfer of funds to the seller.
On settlement day, the transfer of money and shares will be simultaneous, final and irrevocable: on instruction from Strate, money and funds will be electronically transferred at the end of the settlement day.
This is easy with the Strate system because Strate is run on the computer infrastructure used by the Reserve Bank for payments.
Electronic settlement will also eliminate the risk of "tainted" or fraudulent scrip, a problem in any paper-based settlement system. Scrip becomes tainted when, for instance, your share certificate is stolen from you, you apply for a new certificate and, in the meantime, the thief "sells" the shares to someone else with a forged transfer certificate. You hold a genuine share certificate, but you are no longer reflected in the register of the company as the owner of the shares.
You are what Strate calls a "dispossessed" shareholder. But you might not find this out until you take your shares in to be dematerialised - only to discover that the new "owner" has already converted the shares into an electronic record in the Strate system.
No one really knows just how widespread the tainted scrip problem is.
To compensate shareholders who have been dispossessed, Strate has set up a fund financed by contributions from the banks which will hold the share registers in the new electronic system, by the companies listed on the stock exchange, by stockbrokers and by shareholders, to cover just this sort of eventuality. With insurance, the fund can cover dispossessed shareholders' claims up to R2 billion.
The amounts collected from shareholders through a levy will make up 5.2 percent of the fund and the levy will be discontinued once the target amount of R15.5 million has been collected.
Get your scrip ready and take it to your stockbroker or to the CSDP you have chosen for dematerialisation. Strate has worked out a programme for the dematerialisation of all the remaining listed shares this year, and shareholders will be informed through the press when the company in which they hold shares is to be moved into the Strate system.
If you bring your shares in early, you will be charged a safe custody fee because the bank or broker has to keep your certificates safe until the company in which you are a shareholder moves into the Strate system. But it is still a good idea to take your scrip early to give your broker or CSDP time to check that the scrip is not tainted and to take steps on your behalf if it is.
The broker or CSDP will send your share certificate to the transfer secretary of the company in which you are a shareholder for validation. Once the authenticity of the certificate has been verified, the actual conversion process begins. To all intents and purposes, once you have submitted your share certificate for conversion to an electronic record, it ceases to exist in physical form.
You are not obliged to dematerialise your scrip unless you want to sell your shares. But there are two good reasons to dematerialise soon:
* To avoid the risk of tainted scrip when you do want to sell; and
* To avoid delays when you do want to sell.
You can bring all your share certificates at once to your chosen bank or stockbroker.
You will be given a receipt as proof of ownership and, once the shares have been dematerialised, you will start to receive regular statements on your share account. It can take up to 10 days for the shares to be converted into an electronic record. So far the process has taken less than two days, but only a handful of companies have been moved into Strate. From March this year, 100 companies will enter Strate each month.
During the time it takes for your shares to be converted into an electronic record, you will not be able to sell them.
Once your shares are in the Strate system, you can sell any time, just as you could when you held a share certificate. Dividends will be paid electronically into your account with your stockbroker or CSDP and, if you choose, you can receive annual reports and other company information just as you did before dematerialisation.
Strate is the approved Central Securities Depository (CSD) for equities in terms of the Custody and Administration of Securities Act (1992). Strate is also an electronic settlement system.
The process of submission of share certificates to a custodian bank or qualifying stockbroker for conversion into an electronic record.
Central Securities Depository Participant. Strate is South Africa's Central Securities Depository (CSD) for equities, and the CSDPs are the only market players who can work directly with Strate.
Strate is not a bank or a stockbroker and does not collect share certificates. If anyone claiming to be from Strate asks you for your share certificate, do not give it away. Talk to your bank or stockbroker before giving up any share certificates.
AbsaHoffman Stapelberg(011) 832 3361
CitibankDonna Oosthuyse(011) 280 2274
ComputershareTertius Vermeulen(011) 370 7866
First National BankBeverley Brazier(011) 352 1606
Mercantile BankAndrew McGregor(011) 370 5207
NedbankLouise Vermeulen(011) 710 1000
Societe GeneraleKevin Rogers(011) 488 1421
Standard BankMike Barry(011) 636 1801
Telephone (011) 520 7000 or visit www.jse.co.za
Alma Claassen at the Strate Liaison Desk:
Toll-free infoline0800 004 727
Direct phone(011) 377 2635
Fax(011) 833 2494
E-mail Almac@jse.co.za
Website www.strate.co.za
This article was first published in Personal Finance magazine, 1st Quarter 2001. See what's in our latest issue