Financial Markets Bill [B12-2012] and Credit Ratings Services Bill [B8-2012]: National Treasury response to submissions State Law Adviser's and Senior Parliamentary Legal Adviser's opinions

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Finance Standing Committee

07 August 2012
Chairperson: Mr D van Rooyen (ANC) (Acting)
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Meeting Summary

National Treasury reported its response to public comment following the hearings on the Financial Markets Bill [B12-2012] and Credit Ratings Services Bill [B8-2012]. Thereafter the Committee would be expected to adopt the revised drafts of the two Bills for further processing by the National Assembly. The Acting Chairperson observed that one of the key lessons from the global financial crisis was that South Africa's financial and regulatory structures must be up-to-date to ensure that South Africa was able to survive this moment. Most of the so-called big economies were not doing well. National Treasury referred Members to the detailed draft response documents and track-changed versions of the Bills [available to Members only].

Financial Markets Bill [B12-2012]
National Treasury explained background, process and progress, pointing out that none of the legislation currently in process would deal with all the challenges to come: further amendments would be required. There had been some small changes in definitions in response to stakeholders' comments. The definition of 'market infrastructure' had largely replaced the term 'self-regulatory organisation' (SRO). Clause 5 now centralised the powers of the Minister that had been spread across the Bill. Clause 6 now dealt with powers of the Registrar. 'Self-regulating' did not mean that the exchange regulated itself, but that it regulated the market that it serviced. When insolvency proceedings were brought against market infrastructure, in this case an exchange, there must be immediate notification of the Registrar. National Treasury had provided for a complaints mechanism under the exchange rules. Clause 17(2)(w) dealt with the accountability of the SROs. There was a new Clause 17(2(c)(c) and Clause 17(2)(d)(d) dealing with inter-dealer brokers. Clarification had been sought on the segregation of securities. A security must be identifiable and must be separate. Securities held on behalf of someone else must be separated further. The wording in Clause 32(t) made clear that Strate would never be competing with [external] participants but would hold securities only on behalf of a participant. The Bill made a clear distinction between the function that a market infrastructure performed compared to services which the user of that infrastructure would perform. The Bill provided for pledge and cession. The consequence of a pledge was that it was necessary to flag when a pledge had been made. South Africa was required under the G20 commitments to ensure that over-the-counter transactions were cleared through a central facility. Clause 54(1) and Clause 57(2)(b) dealt with decisions made on trade repositories with wide policy impact. These would be subject to regulation by the Minister whereas previously they had been subject to the Registrar's discretion. The Security Ownership Register was a central register at the level of the Central Securities Depository (CSD), Strate, and would be a live record of ownership. This meant a much better visibility of ownership. A code of conduct provided for users of the market infrastructure. There had been some omissions and it had been asked why only certain regulated persons were subject to this code. National Treasury agreed but did not want to impose duplication on any regulated person. The Bill now provided for declaring a new entity a regulated person. Market abuse, insider trading, and prohibited practices were explained and their penalties. There were no changes on auditing. There was a new provision to deal with transparency in terms of how the regulations were issued. National Treasury would generally prefer that, even when the Minister had the power to regulate, the regulators could exercise some of these onerous powers. There should be checks and balances. It was also apparent that there was need from time to time to legislate after the fact.

The Senior Parliamentary Legal Adviser had examined search and seizure or inspection provisions, but had not found any constitutional concerns. There were certain typographical and drafting issues.

ANC Members thanked the National Treasury, the Financial Services Board, and the Parliamentary legal team for taking seriously the concerns of Members. As a result they did not see any further major concerns with the Bill, but saw a contraction in the explanation on SROs. It was unfortunate that the legislation said that the Minister must prescribe the regulations before promulgation. If the players were to continue their current practices, how could one ensure that the regulations were applied to those players who were not yet regulated? The Acting Chairperson asked if there was any benchmark for penalties for insider trading. DA Members asked if the powers of the Minister were complementary to those of the Registrar, suggested shifting the balance of power to the Registrar, feared that National Treasury was following the Department of Industry's trend of legislating by deadlines, were still not convinced that this Bill should be processed before the twin peaks process, and asked what the penalties in terms of G20 were if South Africa did not adopt this legislation. Would it not be better to review the SRO model and then pass this law? The definition of 'this Act' still seemed too broad. It would be ungenerous not to indulge the suggestion that a commitment to the encouragement of competition in South Africa's financial markets should be inserted in the Bill. The regulations were immensely technical and the Committee should consider them. A COPE Member agreed, and was concerned that the unregulated persons would not be regulated unless they dealt in securities.

A Principal State Law Adviser advised that the making of regulations by the executive was a power delegated by Parliament. If Parliament wanted to see the regulations the Committee was able to indicate this in the bill stage, for there was a standard provision to add that the Committee concerned wanted to see the regulations.

The Senior Parliamentary Legal Adviser advised that he was satisfied with the definition of 'this Act' and constitutionality in respect of the issues of delegated legislation.

Credit Ratings Services Bill [B8-2012]
The Senior Parliamentary Legal Adviser had no concerns about liability in the Credit Rating Services Bill. It merely restated what was found in the common law, but would make it easier for those who had suffered loss to approach the matter. The Bill was a limitation of the Bill of Rights but this did not make it unconstitutional.

National Treasury by and large wanted to stick to the common law. Users of credit ratings must use their own judgement. There were two camps of commentators: one said that the Bill was too strict, while the other said that the Bill was too lenient. National Treasury had sought to achieve a balance between the two. South Africa would be the first country in Africa to meet the equivalence requirements. It was very important that South Africa's financial services legislation remained up to date and in line with the best in the world. It was necessary to ensure that the ratings were easy to understand by the class of persons for whom the ratings were intended. Many of the users of ratings were pension fund trustees and ordinary retail investors. It was important that the approach to ratings was consistent across jurisdictions. It was important to ensure that the credit rating agencies' processes had integrity. One was not telling them what opinion to have.

ANC Members said that an opinion had potential [to affect] clients who paid for the opinion. The opinion should not, in the final analysis, harm another person. Perhaps it should be specified to whom the methodology for forming an opinion should be reasonable. Should it not be specified that the methodology should be factual or rather accessible too? Users should be able to download the methodologies from the internet. DA Members asked how a credit rating from a credit rating agency in South Africa could be reconciled with that of a sister agency in another market if the two ratings differed.

Meeting report

Introduction
Mr D van Rooyen (ANC) was elected Acting Chairperson. Mr N Koornhof (COPE) proposed that a decision be taken that if the Chairperson was not available for the next meeting, the Committee Whip would be Acting Chairperson. The decision was so noted.

The Acting Chairperson noted that, following National Treasury's report-back on feedback the Financial Markets Bill [B12-2012] and Credit Ratings Services Bill [B8-2012], the Committee would expect to adopt the revised drafts of the two Bills for further processing by the National Assembly. The Acting Chairperson observed that one of the key lessons from the global financial crisis was that South Africa's financial and regulatory structures must be up-to-date to ensure that South Africa was able to survive this moment. Most of the so-called big economies were not doing well. South Africa was viewed as a country with the potential to provide opportunities for business. As a result, South Africa's legislature was on course to ensure sufficient regulation to enable a better chance of realising these opportunities for the country. Moreover, South Africa was participating in international forums and was accordingly expected to conform to international standards. This was a task that South Africa was not going to shirk, but Members had all agreed that one must move very cautiously, but expeditiously. Beyond these two Bills, there was still much work to do in the form of the Banks Amendment Bill, the Financial Services Laws General Amendment Bill, and the Insurance Law Amendment Bill. The Committee remained on course.

Financial Markets Bill [B12-2012]: National Treasury report-back
Background, process and progress
Mr Ismail Momoniat, National Treasury Deputy Director-General: Tax and Financial Sector Policy, said that National Treasury had given the Committee a detailed response document and this presentation was a summary of it. It was accompanied by a draft track-changed version of the Bill to assist the Committee in comparing the changes against the original. The presentation highlighted the big changes.

As the Acting Chairperson had indicated, a number of bills would follow, and much of the legislation needed to be updated. Moreover, none of the legislation currently in process would deal with all the challenges to come: further amendments would be required, even for the transition, to the extent that there were still issues on which to decide whether to regulate, because internationally there were many discussions, for example, on derivatives, and on what the powers of regulators should be. There were international standards that applied. It was a very specific sector. South Africa's approach, one hoped, was in line with what was done in markets internationally, particularly those with which South Africa dealt. It was important to get the South African perspective across. In this Bill one had gone through this process. It was notable that the regulators and the Minister had much power to regulate or issue directives. Adv Frank Jenkins, Senior Parliamentary Legal Advisor, had commented on some of those issues. These were issues that would guide much future legislation as well.

National Treasury thought that it could resolve outstanding issues with stakeholders in time and comply with the time frame.

National Treasury had received 15 comments on this Bill, which indicated that this Bill was complex, and that only a small number of people felt that they should comment, even though it was widely available. Often the comments came from industry associations, so that they did represent some form of consensus within different constituencies. The issue was that there might be differences between the different constituencies.

He reviewed the Bill's process and progress so far. There had been many consultative workshops, including with the Committee on 01 August 2012.

The presentation would highlight the big changes.

The draft response document went through all the comments and the National Treasury's responses in detail, almost on a Clause-by-Clause basis. There had been a working group with the Financial Services Board (FSB) and other players. However, when there were technical changes, it might be necessary to refer to the Bill.

Definitions (Clause 1)
Mr Roy Havemann, National Treasury Chief Director: Financial Markets and Stability, said that there had been some small changes in definitions in response to stakeholders' comments.

Ms Jeannine Bednar Giyose, National Treasury Director: Fiscal and Inter-governmental Legislation, said that it was noted in respect of the definition 'prescribed by the Minister' that it should clearly indicate that there would need to be publication in the Government Gazette, in respect of matters prescribed by the Minister. National Treasury certainly agreed with that and was clarifying it in the proposed amendments.

Some submissions indicated that perhaps the definition of 'central securities account' contained in the Bill was perhaps somewhat too broad. National Treasury had carefully considered that matter and the overall role of that definition within the legislation, and had come to the determination that the definition as it currently provided was appropriate and played the appropriate role in the legislation. National Treasury recommended that this definition should not be amended.

In respect of the definition of 'derivative instrument', it had been noted that since the Bill was originally published for public comment, at the international level there had been some developments in how 'derivative instrument' was defined. Therefore National Treasury was proposing some slight amendments in order to align it with the definitions in the international standards.

It was proposed that a definition of 'juristic person' be included in the Bill. National Treasury agreed with that proposal and would include that definition.

As to the definition of 'nominee', contained in the tabled version of the Bill, it was proposed that the definition could clarify that it referred to regulated nominees. National Treasury agreed and proposed a refinement to that definition.

In respect of the definition of 'securities', submissions were made that money-market securities should be recognised as a special category of securities. National Treasury agreed. It was also requested that the South African Reserve Bank's share capital and trading in its own shares should be excluded from the ambit of the definition of securities. National Treasury agreed and proposed slight refinements to the definition of securities.

National Treasury had engaged with the Committee and with the Senior Parliamentary Legal Adviser regarding the appropriate scope of definition of 'this Act', and so was proposing a definition of 'this Act' in this Bill that was in line with the discussions held and with the definition in he Credit Rating Services Bill.

In respect of the definition of 'insolvency and proceeding', it was proposed that the definition should clarify that insolvency should commence on filing. National Treasury agreed with that proposal and had put forward an appropriate refinement to the definition.

As to 'execution venue', it was proposed that the definition should potentially allow for certain other execution venues. National Treasury believed that this proposal needed thorough consideration before being addressed. It would bear the proposal in mind in future legislative amendments that might be addressed.

National Treasury was proposing to include a definition of 'market infrastructure' that ensured that all the various entities in the markets were appropriately defined in order to provide a better overall coherence in the regulatory framework.

An 'inter-dealer broker', National Treasury agreed, should be treated slightly differently from an ordinary stockbroker, and should be appropriately regulated in accordance with the functions performed.

National Treasury had proposed some slight extensions of the definition of 'regulated person' to align with a new Clause 5(1) to provide for a regulatory provision for the Minister to ensure that all persons who were conducting securities services would be appropriately regulated.

National Treasury proposed that the definition of 'external parties' be amended slightly to ensure that the meaning was clear and concise.

Ms Kathy Gibson, Arrowpoint Consultant to National Treasury, to ensure that Members fully understood the Bill's restructuring, explained further that the definition of 'market infrastructure' had largely replaced the term 'self-regulatory organisation' (SRO). This did not mean that there were no more SROs, but that, in the category of market infrastructure, an exchange, a central securities depository (CSD), and a clearing house would have regulatory functions, but a trade repository would not.

Changes to the objects of the Act (Clause 2)
Mr Havemann explained that there was a proposal that National Treasury specifically included competition as an object of the Act. Currently the Bill dealt with ensuring competitive securities services. Treasury felt that sufficient and that there was the potential for overlap between the Bill and the Competition Act. Therefore it was felt that competition should be left to regulatory arms to deal with the issue separately.

Regulation and supervision of securities services (Clause 5)
Ms Gibson explained how in Chapter 2 there had been mainly rearrangements, whereby items had been moved from Clause 77 to Clause 5. Given the time constraints, she proceeded quickly with the presentation, mindful of the detail that she had already given the previous week. These changes were generally not in response to comments but to internal discussion on the structure of the Bill.

Clause 5 now centralised the powers of the Minister that had been spread across the Bill.

Clause 6 dealt with powers of the Registrar. Over-the-counter (OTC) derivative instruments would be subject to the Minister's regulation, and then the Registrar would impose the detailed requirements for the trading of those instruments.

There was a different accommodation for how the Registrar and Governor would interact. Previously, in the May 2012 version, there were references to the Governor in terms of the licensing applications, as well as to systemic risk. This had been changed to ensure a clearer line of responsibility. The Registrar and Governor would need to have arrangements in place to identify, monitor, manage and mitigate systemic risk. This was what the new Clause 6(3)(o) was intended to allow for.

Exchanges
Most of the Clauses in Chapter 3 reflected proposals received on the self-regulating market infrastructure. 'Self-regulating' did not mean that the exchange regulated itself, but that it regulated the market that it serviced. Clauses 8 and 10 were similar and had been applied across the market infrastructure.

Clause 8(1)(b) was a new provision. A concern had been raised that there was no principle of good governance that had been captured for the market infrastructure. As a licensed entity, market infrastructure, such as in this instance an exchange, had a number of functions which it was obligated to perform, and those functions gave effect to governance. However, National Treasury agreed that the principle of good governance was sound and had accordingly introduced it.

The principle of fairness and transparency had initially been included as a function of an exchange, but a function was something that an entity was required to perform and the principle of fairness and transparency did not make sense in that context, so it had been accommodated as a principle upfront – that an exchange must abide by this principle and likewise this was applied across all the market infrastructure.

The integrated clearing model spoke to what had been partly discussed the previous week around the fact that in South Africa clearing could happen in different ways. It could happen as part of the exchange CSD functions; it could happen by means of a standalone clearing house; or it could happen by means of a clearing house linked to an exchange. In this Bill a model had not been imposed. However, it had been insisted that irrespective of the model, there should be an equivalent standard. The revised Bill accommodated exactly that.

A notification of insolvency proceedings related in part to the definition already discussed and the issue of when the proceeding began, which was indeed upon filing. That change was inserted. When insolvency proceedings were brought against a market infrastructure, in this case an exchange, there must be immediate notification of the Registrar.

Under the exchange rules, there were concerns raised that for the users of the exchange, there was no set process as to how complaints could be brought against the exchange, and when those complaints should appropriately be escalated to the Registrar. As a result, National Treasury had provided for a complaints mechanism. It must be noted that a user of an exchange could at any time approach the Registrar's office. However, this at least provided for a paper trail and proved the accountability of the market infrastructure in terms of how it dealt with and interfaced with its users.

Clause 17(2)(w) dealt with the accountability of the SROs. Members would recall that one of the most significant concerns was that a self-regulatory organisation was given much power and authority over its users, and therefore it was necessary to increase accountability of those institutions. The complaints mechanism was one way of increasing that accountability. Transparent pricing was another. Likewise this extended to other market infrastructure also.

There was a new Clause 17(2(c)(c) and Clause 17(2)(d)(d) dealing with inter-dealer brokers. As Ms Bednar-Giyose had indicated, there was a new provision indicating who such dealers were. These provisions provided for an exchange to make rules for inter-dealer brokers, recognising the role that they were playing in the market in matching buyers and sellers and the significance that this implied.

There had been a discussion of when an exchange was indeed an exchange. An inter-dealer broker did not constitute an exchange. If an inter-dealer broker wanted to be responsible for the final transaction event, the broker would need to be licensed appropriately. It was intended to close gaps in the legislation.

Central Securities Depositories
Clarification had been sought on the segregation of securities. A security must be identifiable and must be separate. Securities held on behalf of someone else must be separated further.

In terms of the functions of a CSD, a concern had been raised on its jurisdiction in relation to certificated securities. A concern was raised that Strate did not have jurisdiction over the certificated environment. However, Clause 32(m) provided that a person who wanted to keep his or her certificated instrument with Strate was allowed, though not compelled, to do so. Therefore Strate had to be empowered in those instances to impose rules and requirements.

There was a question around the enabling of a link-up of an external CSD. This concerned an external central securities depository which could enter directly into the markets as a participant. There were concerns that Strate, as the local CSD, might be competing with local participants, and whether allowing this external participant would be introducing custody and settlement risk. The wording in Clause 32(t) made clear that Strate would never be competing with [external] participants. It would be holding securities only on behalf of a participant.

In terns of the custody and settlement risk, external participation would not be allowed without significant regulatory oversight and impact assessment. This would take place in terms of Clause 5(3) in which the Minister had powers to issue regulations about external participation in the markets.

Conflicts of interest had been an ongoing issue. In the Securities Services Act (No. 36 of 2004) (SSA) there was not a clear distinction between the function that a market infrastructure performed compared to services which the user of that infrastructure would perform. This Bill clearly made this distinction. So an CSD or an exchange could not provide a service that competed with an authorised user or participant. Clause 32(s) and Clause 32(t) gave further extension to this principle.

Under the pledge of cession of securities, pledging and cession referred to the instance where a pledge was where one wanted to give – in order to proceed with a transaction, one was giving away some rights to a security that one held while retaining some rights. A cession was where one gave all one's rights away and where one could be thinking of a transfer of ownership. There were two issues here. One dealt with securing a debt, and whether that was the appropriate term. The Latin term in securitatem debiti was precise and well-understood, whereas the nearest plain English equivalent was not appropriate.

The Bill provided for pledge and cession. The consequence of a pledge was that it was necessary to flag when a pledge had been made. In other words, if someone had given some rights of his or her security over one could not pledge those rights again to somebody else. To prevent that, it was necessary to flag that there had been a pledge of those rights.

On the other hand, a cession was where someone effectively sold a security. It was not, strictly speaking, selling, but effectively it was. That would potentially result in a tax event. What one saw in the markets , and which was reflected in the Bill, was that it was necessary to provide either for the pledge or for the cession. The current market practice did something in between this. In the market one did not call it a pledge or a cession; effectively there was a transfer of all rights, but one wanted to avoid the tax, so one did not call it a cession. Also one did not want to flag it, so one did not call it a pledge. So there was a proposal to include another name to enable circumventing both these impositions: National Treasury thought this inappropriate. She explained the possible potential for tax events. As a result the Clauses were retained as they were.

Mr Havemann explained that, as Ms Gibson had said, there was basically no change in the above Clause, but the changes highlighted in the comments were incorporated in the amendments to the Taxation Laws Amendment Bill. It had been attempted to do the amendments so that they fitted together.

Even though legally it was the correct way to proceed, National Treasury did not want to cause a disruption in the markets, so to the extent that it was appropriate it would provide temporary exemption for these existing practices so that it could work out how to manage them going forward.

Clearing House
Then Mr Havemann reviewed the concerns and changes that the South African market was too small to justify a fully-fledged central facility. As explained the previous week, South Africa was required, under the G20 commitments, to ensure that OTC transactions were cleared through a central facility, particularly because the majority of South African transactions might be between South African facilities and foreign banks, while foreign banks might have requirements to clear offshore.

There were also concerns that the Basel III capital and margining requirements needed to be submitted by January 2013. There were also concerns about the extra-territoriality of the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (H.R.4173) [USA] and about the European requirements. These were the same two requirements that had affected the Credit Ratings Services Bill [B8-2012]. National Treasury had made very small changes to the Bill to allow essentially for three different approaches, and had clarified the wording. Essentially this was to allow for an external clearing house, which would have to pass an equivalence test. This test would be determined on an international level. The equivalence requirements would be set out in particular by Basel, but also by the International Organisation of Securities Commissions (IOSCO) . This would also allow for the registration of a foreign clearing house in South Africa, and also for a domestic clearing house. These three options would therefore be available to clearing house participants.

There was also a process for complaints by clearing members against the CSD in respect of the exercise of functions.

Similar concerns were raised that defining a trade repository as a company incorporated in terms of the Companies Act effectively excluded an application from an external trade repository (TR).

National Treasury would as far as possible prefer that an external international trade repository to register with the Financial Services Board (FSB) so that the FSB could ensure that trade reporting was done appropriately. He explained the changes.

Clause 54(1) and Clause 57(2)(b) dealt with decisions made on trade repositories with wide policy impact. These would be subject to regulation by the Minister. Previously that had been subject to the Registrar's discretion. However, after consultation with Adv Jenkins, it had been decided that this should be in subordinate legislation – namely the Ministerial regulations.

General Provisions applicable to self-regulating organisations
Ms Gibson said that Chapter 7 largely reflected the changes that she had indicated at the beginning, where that term SRO had been replaced by market infrastructure. This was correct because all SROs were market infrastructure, whereas not all [items of] market infrastructure were SROs.

The most significant change in the Financial Markets Bill in this light relative to the Securities Services Act was the introduction of a trade repository, which would not be an SRO.

Going forward there was a question about the separation of the regulatory versus the commercial activities or functions that a market infrastructure was expected to perform. This would form part of the debate on the appropriate SRO model for South Africa.

There were three main issues: firstly the licence renewal – this had been changed to an annual licence assessment, and contraventions would be referred to the enforcement committee; secondly, the conflict of interest in having both a commercial and regulatory role – therefore accountability and conflict of interest provisions had been strengthened; and thirdly, standards would be changing and evolving over time, and it was necessary for the Registrar to have flexibility to ensure that these standards were kept pace with – these standards would be subject to assessment by the market infrastructure and this assessment would be made public.

Further on conflicts of interest, the additional business Clause, the new Clause 61, also dealt with another element of conflict of interest. There was also a new Clause which prohibited any additional business which introduced systemic risk.

The Security Ownership Register was a central register at the level of the CSD Strate and would be a live record of ownership. This meant a much better visibility of ownership in real time. This was a good thing. National Treasury was not allowing for the CSD to compete with participants. Even if a CSD was holding securities at its own level, if would be doing so on behalf of participants. It could never be doing so as a participant itself.

Vertical integration was a general concern around the integrated nature of the market infrastructure, in particular the relation between the trading entities (the Johannesburg Stock Exchange (JSE) with Strate) and the market users, particularly in the environment of an SRO model. This concern would be dealt with after the Bill was passed in the context of the market infrastructure-SRO review process and twin peaks reforms over the next two years.

Code of conduct
A code of conduct provided for users of the market infrastructure. There had been some omissions and it had been asked why only certain regulated persons were subject to this code. National Treasury agreed but did not want to impose duplication on any regulated person. For example, National Treasury had not provided for a code of conduct for an exchange, but the requirements for an exchange to be licensed were much more onerous than a code of conduct could ever be.

Provisions relating to unlisted securities and nominees
The Bill now provided for declaring a new entity a regulated person. This was to ensure full legislative coverage.

Clause 77 had been moved to Clause 5, as already mentioned, to improve drafting. Only approved nominees would be accepted in terms of this legislation. There had, however, been concern over nominees of certificated securities and there were practical concerns. So there had been alignment with the Companies Act to ensure that this problem would not arise in future.

Market abuse
Ms Gibson spoke broadly about insider trading and the other prohibited practices. It was necessary to consider the following: firstly, what insider trading was, and when it was a prohibited offence; when a contravention triggered an infringement; and what the punishment or sanction for a contravention was. Insider trading was a criminal offence, but there was the onerous requirement that the offender should have known. Under the new version, it remained a criminal offence, but only if the person knew that he was conducting insider trading. The safe harbour provision remained.

Other prohibited practices were subject to administrative penalty and to a test of reasonableness. National Treasury thought this sensible and appropriate.

Auditing
There were no changes.

General provisions
There were concerns that the various curatorship provisions had unintentionally captured the process regarding banks as well as the South African Reserve Bank. However, these entities were dealt with appropriately in a very specific way in different legislation.

There was a new provision to deal with transparency in terms of how the regulations were issued. This was particularly important given the increased role of the Minister in issuing regulations. That role was necessary given the large and significant policy impact of many of these provisions. A new Clause assisted with understanding the accountability of how those regulations were issued.

It was important to maintain confidentiality. There were also concerns around high-frequency trading. This was a specific behaviour which should not be addressed explicitly in the Bill, which should rather give the flexibility and the enabling framework in which the likes of high-frequency trading and other behaviours of concern could be dealt with.

Mr Momoniat alerted Members to concern on the wording of the clearing house provisions. Derivative contracts were often cleared in the USA. National Treasury sought to resolve this issue to the satisfaction of the banks and the JSE.

National Treasury would generally prefer that, even when the Minister had the power to regulate, that the regulators could exercise some of these onerous powers. He did not know best how to proceed on this, but felt that there should be checks and balances. It was also apparent that there was need from time to time to legislate after the fact.

Members had been given virtually the final version of the Bill, but there were a few issues to be mentioned next week when the Bill would be studied Clause-by-Clause.

The Acting Chairperson congratulated Mr Havemann on being appointed permanently to his position as Chief Director: Financial Markets and Stability.

Senior Parliamentary Legal Adviser's opinion
Adv Frank Jenkins, Senior Parliamentary Legal Adviser, said that his comments on the Financial Markets Bill were almost the result of his comments on the Credit Rating Services Bill. The issues of powers delegated to the Minister, publication, and the role of Parliament had been taken up. In a piece of regulation establishing a regulatory framework there were almost inevitably issues of privacy that were being limited. He had looked at search and seizure or inspection provisions, but had not found any constitutional concerns. There were certain typographical and drafting issues.

Discussion
Ms Z Dlamini-Dubazana (ANC) thanked the National Treasury, the Financial Services Board, and the Parliamentary legal team for taking seriously the concerns of Members. As a result she did not Members to find any further concerns with the Bill.

However, she saw a contraction in what Ms Gibson had said about SROs.

The Minister had not yet prescribed the categories according to the regulations. If one was to increase the accountability, was one going to consider the categories? It was unfortunate that the legislation said that the Minister must prescribe the regulations before promulgation.

If the players were to continue their current practices, how could one ensure that the regulations were applied to those players who were not yet regulated.

Mr D Ross (DA) commented on the powers delegated to the Minister. Were the powers of the Minister complementary to those of the Registrar?

Since different ministers had different approaches, would it not be better to shift the balance of power to the Registrar?

Mr T Harris (DA) congratulated the drafting team on their mammoth achievement.

The Department of Trade and Industry (DTI) was littered with laws that were resting on the President's desk, or were suspended pending another review: the DTI tended to legislate by deadlines and frankly it did not work. It was for Parliament to say when a law was ready. He was worried that National Treasury was beginning to follow the DTI's trend.

He was still not convinced that this Bill should processed before the twin peaks process, and that banks would be unable to trade in OTC derivatives without the Bill.

He asked what the penalties in terms of G20 were if South Africa did not adopt this legislation.

He felt that regulation of OTC derivative was a prudential matter, while under twin peaks derivatives would be under the South African Reserve Bank. So why would one want now to put them under the FSB?

The review of the SRO model reinforced Mr Harris's concern about sequence and haste. Would it not be better to review the SRO model and then pass this law.

The definition of 'this Act' still seemed too broad. He would have preferred to see it tightened still further.

It would be ungenerous not to indulge the suggestion that a commitment to the encouragement of competition in South Africa's financial markets should be inserted in the Bill.

Like Mr Ross, he had concerns about the Minister's powers. Did we not need to moderate those powers?

As to conflict of interest (Clause 61), he was not sure that the assessments and complaints model was sufficient. It seemed relatively weak. Were there any other models that could be considered.

Had anyone been prosecuted for insider trading in South Africa?

The real substance was in the regulations, but such regulations as those of the proposed Act were immensely technical and should come to the Finance Standing Committee.

Mr N Koornhof (COPE) served on a new committee to review regulations but agreed that the proposed Act's regulations must come to this Committee.

He was concerned that the unregulated persons would not be regulated unless they dealt in securities.

The Acting Chairperson asked if there was any benchmark for penalties for insider trading.

Mr Momoniat replied to Mr Harris and Mr Koornhof that National Treasury would prefer the regulators to be tougher. It was important also that the criminal justice system worked; it worked very slowly. The FSB had a very effective enforcement process in place, however. The financial sector was very specialised and more globally integrated than any other. The equivalent UK House of Commons standing committee [the Treasury Select Committee] had long hearings but met very often. He would welcome a debate on how Parliament could be more effective in ensuring that National Treasury and the FSB actually did their work and moved as quickly as society expected. The stronger National Treasury and the FSB were, the more preventative actions they could take. However, there was a need for checks and balances.

National Treasury was not driven by deadlines. Unfortunately the transition to twin peaks was dangerous. National Treasury wanted to come to Parliament annually with a Financial Services Laws General Amendment Bill.

There was no reference in the Bill to the SRO model. However, SROs were not regulating themselves, but the players in the exchange.

National Treasury would have liked the regulators to have a much stronger role. However, it was only the Minister who could issue subordinate legislation. It would help if Parliament could look at such subordinate legislation, but it was necessary for the regulators to be empowered to handle much of the lengthy detail.

Despite twin peaks, this Bill was required. Twin peaks dealt with the overall architecture. However, for each activity dedicated legislation was required.

Ms Gibson replied that the SRO model implied that the industry was regulating itself, rather than the entity was regulating itself. It was an internationally accepted and known term.

Care was needed not to mix the market infrastructure (the exchange, the CSD, the clearing house, and the depository), which was clearly defined and by definition were licensed entities and had users who were clearly defined, with other players that were not an exchange, nor a CSD, nor an authorised user and not a participant, but were still providing securities services and playing a role in the financial markets. It was difficult to provide for them upfront in the legislation and hence National Treasury had tried to provide for flexibility. Whether it was appropriate under the Minister's powers was a subject for discussion. Policy matters had been put under the Minister's powers, while putting effect to that policy had been put under the Registrar's powers. These powers were not competing with each other in terms of Clause 5 and the new Clause 6. On the contrary they complemented each other. She gave examples.

Mr Havemann said that Clause 107 set out the process and the requirements of when the Minister could regulate and how. National Treasury might engage with Adv Jenkins to make sure that these provisions were all appropriate.

Ms Gibson said that there was a tendency, as regards the operational dependence authority of the regulator to make rules, to believe that the regulator was all-powerful, all-knowing, and all-seeing. However, the regulator was subject to the same weaknesses as other entities, be they the Minister, the SROs or the users. What was needed was accountability and transparency in the way decisions were made, together with checks and balances.

It was not about the deadline, but about whether the law was ready. National Treasury thought that the law was ready.

It should be noted that responsibility for OTC derivatives regulation rested with the registrar: there were processes under way to give effect to this law and they were broadly represented by all the relevant regulators and stakeholders. Regulations would not be issued in isolation.

National Treasury agreed that the promotion of competition was important. The Registrar had a direct responsibility to be considering competition in terms of his or her application of the law. In Including it as an object there was an implication that one was able to do something only if it satisfied all the objects of the Act. The current framework did not provide for competing objects of the Act. However, National Treasury believed that it had accounted for competition, not just in terms of how the registrar must account for competition, but likewise in how the registrar and policy maker must engage with the Competition Commission.

The Minister's powers expanded, but not without parameters in terms of checks and balances as to how regulations were passed. National Treasury had committed itself to an impact assessment, with stakeholder engagement, on OTC derivatives, although this was not structured in the law.

Ms Gibson could talk at greater length on the responses on conflicts of interest.

The SRO model had been retained because it was working. It had, moreover, proved itself effective over a highly turbulent recent history. It was a cost-effective way to regulate. However, there were pros and cons.

If there were elements of the law that needed amendment, it was better to amend sooner rather than later, rather than become embroiled In another process. These reforms were necessary and important, and engagement on these matters had been exhausted.

The Bill was a largely a revision of the SSA, so the core elements of the SSA were retained, but this law introduced new elements, such as the concept of a clearing house and trade repository and the concept of the extended concept of the regulation of OTC derivatives. By and large the existing structure was retained, together with the SRO model and the framework of the legislation, while amending it where operationally necessary.

The Acting Chairperson thanked Ms Gibson and commended her for her detailed responses, but time was running out.

The FSB replied that it had achieved several successful prosecutions for insider trading. The highest penalty awarded in this context was R20 million.

Mr Solly Keetse, FSB Head: Market Abuse, added that the FSB had a very efficient enforcement mechanism. It could refer offenders to the Directorate of Public Prosecutions. Since 1999 when the first enabling legislation for market abuse was passed, the FSB had referred a total of about only eight cases. The reason for this, as indicated by Mr Momoniat, was that South Africa's criminal justice system worked very slowly and the burden of proof in criminal cases had to be proved beyond reasonable doubt. Hence the FSB preferred administrative sanction where it had to prove its case on the balance of probabilities. As already indicated, the FSB had imposed heavy penalties for insider trading in the past.

The Acting Chairperson concluded this part of the meeting.

Principal State Law Adviser's opinion
Adv Xoliswa Mdludlu, Principal State Law Adviser, Office of the Chief State Law Adviser, clarified that the making of regulations by the executive was a power delegated by Parliament. If Parliament wanted to see the regulations the Committee was able to indicate this in the bill stage, for there was a standard provision to add that the Committee concerned wanted to see the regulations.

The Acting Chairperson noted that point and would ensure that it was inserted in the Bill that the Committee wanted to see the regulations.

Senior Parliamentary Legal Adviser's opinion
Adv Jenkins had engaged thoroughly on the definition of 'this Act' and, on the request of the Committee, on limiting it to the appropriate level and ensuring that constitutionality was satisfied in respect of the issues of delegated legislation. He was satisfied that discussions were fruitful and that it was a good model. The questions raised had been addressed.

The Acting Chairperson concluded the first part of the meeting and proceeded to the Credit Rating Services Bill [B8-2012]

Credit Ratings Services Bill [B8-2012]: Senior Parliamentary Legal Adviser's opinion
Adv Jenkins had no concerns about liability in the Credit Rating Services Bill. It merely restated what was found in the common law, but would make it easier for those who had suffered loss to approach the matter.

It had been asked if the Credit Ratings Services Bill was not a limitation of the Bill of Rights. It was indeed a limitation, but this did not make it unconstitutional. South Africa differed in this respect somewhat from the USA. South Africa had taken a specific model, based partly on the Canadian, partly on the German, and partly on the United States model. He explained in detail. Regulation of trade was not unreasonable in the present circumstances. There had been an attempt to make search and seizure proportionate to what the legislation was trying to achieve.

In short, he did not hear any constitutional alarm bells in reading these two Bills. However, his door would remain open as discussions in the Committee progressed.

Discussion
Mr Koornhof noted that criminal liability had been taken out of the Credit Ratings Services Bill. However, he asked Adv Jenkins for his opinion on civil liability.

Adv Jenkins replied that, in common law, if one transgressed the boni mores [good values] of society one entered the area of unlawfulness. There was a duty of care which a common law court would accept. It would be difficult to hold someone liable if he or she had acted in good faith in giving a credit rating. This was so simply because one was dealing here with pure economic loss. In South Africa, at least in a delictual sense, there was a concept of 'remoteness of damages', whereby one could not claim for indirect damages. In other words, if a person suffered a loss and in consequence another person suffered a loss, such a third party could not claim. In a contract it was a little different, but in a contract this issue came up, for example, in booking a hotel room, or accepting treatment in a hospital or from a dentist, where one had to sign away rights. Clause 19 said that this signing away of rights was not allowed. As under the Consumer Protection Act, one could not contract out of liability vis-à-vis a client. This was an extension of the common law. However, a credit rating agency could still take insurance against this risk. It would still attract liability but someone else would pay the fine.

There were two schools of thought. One was that, if it [civil liability] was in common law, why was it necessary to put it in the Bill. The second was to include it for the sake of explicitness. Including it did not change the law as such. However, in the end it was a policy decision for the Committee as to whether it wanted this provision included or not.

Credit Ratings Services Bill [B8-2012]: National Treasury report-back
Mr Momoniat felt that Adv Jenkins had dealt with liability in much detail. National Treasury was open on this issue, but by and large wanted to stick to the common law. Users of credit ratings must use their own judgement.

The second set of issues was endorsement, on which there were 14 comments.

Mr Havemann went through them very quickly, with a time limit of five minutes. He referred Members to the comprehensive draft response document. There were two camps: one said that the Bill was too strict, while the other said that the Bill was too lenient. National Treasury had sought to achieve a balance between the two.

South Africa would be the first country in Africa to meet the equivalence requirements. It was moving more slowly than other countries, except African countries. It was very important that South Africa's financial services legislation remained up to date and in line with the best in the world.

It was a criminal offence to purport to be a credit rating agency, even if one was not. This was on the basis of fraud.

It was necessary to ensure that the ratings were easy to understand by the class of persons for whom the ratings were intended. Many of the users of ratings were pension fund trustees and ordinary retail investors.

It was important that the approach to ratings was consistent across jurisdictions.

There had been misunderstanding of what the Bill was trying to achieve on endorsement. National Treasury had clarified that.

No change was proposed to Clause 19.

Discussion
Ms J Tshabalala (ANC) was not entirely convinced on how the matter of opinion had been handled in the Bill. Could not one say that the opinion was an expression of oneself on an issue? If one said that it was freedom of speech, that could not be regulated, but it had potential [to affect] clients who paid for the opinion. In the Bill one was trying to say that, even if it was a user who utilised it, the opinion should not, in the final analysis, harm another person. Perhaps it should be specified to whom the methodology for forming an opinion should be reasonable. Should it not be specified that the methodology should be factual or rather accessible too? Users should be able to download the methodologies from the internet.

Mr Harris asked how a credit rating from a credit rating agency in South Africa could be reconciled with that of a sister agency in another market if the two ratings differed.

The Acting Chairperson asked if there was a list of the credit rating agencies in South Africa, besides the big three.

Mr Roland Cooper, FSB Board Senior Specialist: Credit Ratings, replied. There was the big three; and in addition there was Ratings Africa and Global Credit Ratings. There was also the Japanese Rating Agency, and, of course, others specialising in particular markets.

Mr Momoniat said that it was important to ensure that the credit rating agencies' processes had integrity. One was not telling them what opinion to have.

The Acting Chairperson thanked the delegates for their succinct responses and adjourned the meeting.

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