1

December 2012

www.strate.co.za

StrateTalk

Strate lauches Corporate Action Services

Collateral squeeze - who can afford it?

Voted best employer in South and southern Africa

Strate selects TCS BaNCS for Fixed Income Depository

operations

Euroclear opens a Segregated Depository Account at

Strate

South Africa at the forefront of Integrated Reporting

New CPSS IOSCO Principles are leaving nothing to chance

Advances in the LEI code

Principles to further reduce counterparty risk in Close-

Out Netting agreements under way

Strate creates a forest in the Eastern Cape

Innovative share charity scheme has raised over R2 million

for a host of worthy South African causes

In memory: Richard (Rick) Gray Cottrell

Social media 101

In this edition

L e a v i n g n o t h i n g t o c h a n c e

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STRATETALK 2

Strate is pleased to announce the creation of the EquitiesCorporate Action Subscription Services (ECASS). Theproduct / service is aimed at assisting users to obtainstandardised corporate action information that significantlyenhances the process ing o f corpora te ac t ions .

Corporate actions announcements are a critical and a highrisk part of the securities processing business. The intricacyassociated with such events continues to make the corporateactions arena one of the most complex post-trade activitiesto manage.

Currently in the South African market, corporate actioninformation is disseminated via various sources, includingStock Exchange News Service, circulars, annual reports,newspapers, etc. This information is subsequently interpretedby the various market players and distributed accordingly,thereby appearing in various formats, containing duplicated,and in some instances, inconsistent information that is opento interpretation.

ECASS provides a single sourced, sacrosanct, standardisedformat of information that exists for a corporate actionannouncement. It allows market players and investors to makequick and accurate decisions from the simultaneousdissemination and processing of information across the market,without interference from downstream parties and systems.

The service provides a consistent message compliant withthe International Standards Organisation (ISO) Standards thatincreases confidence and shareholder activism as the singlesource of validated information increases the quality of data.The reduction of data scrubbing and capturing of the corporateaction information by intermediaries and investors decreasesthe operational risks and the potential costs incurred fromsuch activities, while overcoming many complexities associatedwith the processing of corporate actions.

Furthermore, a structured, easy-to-understand andcomprehensive English commentary on the corporate action,which includes relevant tax-related information, is beneficialto users and meets clients’ evolving requirements and needsin line with global best practice. ISO SWIFT MT564 (CorporateAction Notification Message) users receive same-dayinformation, while PDF and CSV users receive it the followingday. Strate has also included a centralised service desksupport for corporate actions within the South African market,offering a single point of contact across all financial instruments.The concept enables straight-through-processing to marketplayers, intermediaries and investors in the quickest possibletime.

For further information on the Equities Corporate ActionSubscription Services concept, please contact GregoryNaicker on 011 759 5371 or ecass@strate.co.za

Strate lauches Corporate Action Services

www.strate.co.za

December 2012

STRATETALK 3

When Lehman Brothers faced collapse, pressing margin callsand the lack of liquidity exposed the interdependencies andweaknesses of the financial markets and sparked the GlobalFinancial Crisis (GFC).

As a result, regulators focused on mechanisms to detect thebuild-up of concentrated risk, increased capital adequacy andliquid asset ratios for banks and long-term assurance companies,central clearing of Over the Counter (OTC) transactionsthrough Central Counterparties (CCP), asset safety and thecollateralisation of financial transactions that are not centrallycleared.

With the demand for collateral expected to increase with theplethora of new regulations, pressure will be placed on the useof cash as collateral or margin, leading to a greater use ofillegible high-quality securities as banks endeavour to retainliquid assets on their balance sheets for regulatory requirements.

Can local banks and affected parties, such as pension fundsand hedge funds, afford the risk of not adopting collateralmanagement and collateral optimisation mechanisms?

Strate recently held a Collateral Management Seminar inNovember, with speakers from The Hedge Fund Academy, MDAttorneys, Absa Capital, Deloitte Consulting and Strate Ltd toreview the impact on collateral of changing regulation and discussthe need for collateral management systems and collateraloptimisation from a South African perspective.

The increasing demand for collateral has been well publicised,underpinned primarily by the adoption of Basel III, which aimsto strengthen the banks' capital reserves through holding greateramounts of liquid assets or high-quality eligible collateral againstfinancial exposures. In addition, Regulation 28 of the PensionFunds Act and Solvency II for life companies will also bring agreater requirement for the use of collateral.

Marilyn Ramplin of the Hedge Fund Academy highlighted thatwhen the GFC hit, not all banks could determine their exposuresto possible defaulting parties. She said that when LehmanBrothers collapsed, banks tried to work out if they had enoughcollateral themselves and if they were collateralising the rightcounterparties.

“Collateral management must have a legal framework to underpinthe structures in place in order to make sure the collateralframework that has been built has a very strong foundation. Themost important lesson is that you can have the most sophisticatedcollateral management process, but if you don't have the rightlegal framework, the whole thing falls apart…and some companieslearnt that the hard way,” added Ramplin.

Since the crisis, the Group of Twenty Finance Ministers andCentral Bank Governors (G-20), which includes South Africa,have set requirements to ensure the mitigation of any furtherrisks associated with the areas that contributed to the actualcrisis. Many of these G-20 requirements specifically focus onover-the-counter (OTC) derivatives and the lack of high qualitycollateral against these financial exposures as a key contributorto the crisis.

As such, all OTC derivative contracts will need to be centrallycleared through CCPs and reported to a Trade Repository. Forthose OTC derivatives not centrally cleared, the OTC counterpartywill be required to hold additional capital against those positions,making it more expensive to trade OTC derivatives. Relief willbe granted where eligible high quality collateral is in place againstthese exposures.

“OTC derivatives play a very important part in the market becausethey help hedge risk. If one now has the additional cost of ahigher capital charge on OTC derivatives, we need to think aboutwhat the impact will be on the market and how we mitigate risksassociated with this,” added Ramplin.

Michael Denenga of MD Attorneys maintained that internationaldevelopments coming to the fore are also expected to changethe landscape locally in South Africa. “There are rules andrecommendations from the International Institute for the Unificationof Private and International Law (Unidroit) aimed at improvinglaws around securities holding, transfer and collateralisation.”Denenga added that collateral is an important aspect of theFinancial Markets Bill as the Bill enables central counterpartyclearing, reporting to a trade repository and segregated depositoryaccounts, to name a few.

According to Ashley Sadie of Deloitte Consulting, the use ofcollateral has skyrocketed from a value of US$437bn in 2001 toUS$ 3.6trn over the last ten years, as lenders called for a 'promise'that they would have some form of asset that could be taken ifthe borrower had to default against its liability.

With cash predominantly used as collateral in South Africa, thenew Basel III rules could make banks want to hold more cash,making them unwilling to lend. Sadie says: “Already, Basel IIrequires greater amounts of high-quality liquid assets. However,there is a shortfall of these assets among South African banks.The South African Reserve Bank has indicated that there will bean estimated R900bn liquidity gap should the banks adopt BaselIII in their current operations.”

As a result, a shortage of high-quality collateral in the market islikely as industry pressures are expected to create a liquiditysqueeze if not properly managed.

Collateral squeeze - who can afford it?

www.strate.co.za

December 2012

STRATETALK 4www.strate.co.za

December 2012

Strate reaches 100% dematerialisation for South Africa's bond marketThe last immobilised security for South Africa's bond market has been dematerialised. Strate is pleased to reportthat the last certificate in its vault was dematerialised on 28 November 2012, bringing the total assets under custodyin the CSD to R1.57 trillion (R1 577 997 629 670.79).

“This is a huge achievement for the bond market and Strate as the elimination of paper certificates brings a numberof efficiencies, cost benefits and the mitigation of risk for the country’s financial markets,” says Iann Seymour-Smith,Head of Custody and Settlement at Strate.

In addition to the bond market, Strate also has assets under custody in the equities market of R5.68 trillion and theelectronic money market of R513.29 billion.

To comply with these changes, local banks may find it beneficialto substitute cash used as collateral with other assets andstreamline their operations to find effective ways to conservecash, according to Absa Capital's Jan Kotze.

Globally, there is a move to use securities as collateral. Anestimated R7 billion of listed equities are sitting on the books ofSouth African banks, according to Deloitte, which could be usedas collateral to free up cash. “Equities can be viewed as part ofan holistic approach to try and meet the new Basel III requirements.Equities, if managed correctly, could be a good alternative tocash for collateral,” said Sadie.

Strate's Chief Operating Officer, Anthony van Eden, added thatthe management of eligible collateral in terms of the bilateraleligibility criteria can be administratively intensive and often leadsto a lack of visibility of the size and location of collateral placedand the inefficient use of collateral. The build-up of collateralsilos across financial products and geographic locations alsoleads to inefficient use of collateral or often over-collateralisation.Studies show that in 2007, global defaults on debt were US$8billion, which spiked to over US$400 billion a year later - whenthe financial crisis hit.

“There is a growing demand for more automated collateralmanagement solutions, focusing on systems that streamlineprocesses and improve operational efficiencies through enhancedstraight through processes. The focus and trend internationallyis to adopt a single-, centralised market-wide collateralmanagement system that manages the members' pool ofexposures against the members' pool of collateral placed,” addsvan Eden.

The South African financial market is looking at a centralised,market-wide, multi-asset class integrated collateral managementsolution to complement current collateral management functionswithin financial institutions.

This is aimed at improving the tracking and efficient use ofcollateral management in South Africa with a service that will beoffered by the country's licenced Central Securities Depository,Strate.

It will be an effective automated collateral solution on a market-wide 'pooled' basis, with the opportunity to optimise the totalcollateral requirements of the members to the service againstfinancial exposures without the requirement to place any additionalcollateral, which may have been the case on a pure bilateralarrangement with counterparties. This optimisation is achievedthrough a series of collateral substitutions among the multitudeof counterparty bilateral relationships in the 'pool'. This conceptreduces the requirement for cash margin calls that are normallyencountered on bilateral relationships when there is aninsufficiency of eligible securities. Only the member that placedcollateral in the pool can call for its return.

Pooling of available collateral to meet the pooled exposures ofmembers is important because securities that are available tobe given and received as collateral are visible and can immediatelybe substituted when required. Regular intraday automatedcollateral valuation ensures that any collateral paced that is nolonger required will automatically be returned to the rightful owner.Strate's Tri-Party Collateral Management service is designed forthose institutions without any form of collateral management aswell as to compliment current collateral management functionsand systems that may exist within institutions. The service isaimed at cost reduction and efficiencies by using existing systemsand processes, while complying with the region's regulations tomanage eligible dematerialised bonds, equities and moneymarkets in multi-currencies.

It is expected to launch in November 2013.

For more information, please contact Steve Everett on011 759 5496 or SteveE@strate.co.za.

STRATETALK 5www.strate.co.za

December 2012

Voted best employer in South and southern AfricaStrate has been voted the southern Africanbest company to work for regional winner in the 2012 Deloitte Best Company To WorkFor Survey's small companies category.

Strate has always excelled in this competitionand has consistently improved on its resultssince first entering the competition over seven years ago. The company was also acknowledged as one of the Standard of Excellence Achievers.

The Deloitte Best Company To Work For survey has becomewidely recognised as a great insight into the overall employmentexperience of employees in participating companies. The surveyuses an empirically researched and validated process, givingcompanies a unique opportunity to understand how they areperforming in terms of employees' needs and expectations.

“Strate recognises that the well-being of its employees is acritical factor for its future progress and prosperity, especiallyin the face of global competition.

It invests in a number of employee retention and growthinitiatives, recognising the need to build relationships with akey stakeholder group - its staff,” says Monica Singer, Strate'sCEO.

In this survey, Strate was rated on a number of dimensions,such as job satisfaction, management style, leadership, valuesand culture, training and development, HR policies andprocedures, change management, diversity and transformation,performance management, recognition, reward and innovation.

The Best Company To Work For survey has been conductedannually by Deloitte since 2000. It identifies and celebratescompanies across Southern Africa that have been rated bytheir employees.

“It is well documented that a happy employee that is held withhigh regard is a productive and loyal employee. As a SouthAfrican Financial Markets Infrastructure (FMI), Strate pridesitself in being recognised as an employer of choice in its industryand in southern Africa. Strate continuously strives to keep itsstaff content and aims to create a happy, healthy workplaceenvironment,” concludes Singer.

Thank you FNB for winningour hearts and appetites...

It was with great delight and surprise that FNB

delivered 120 'home-baked' cupcakes to congratulate

each Strate employee for winning three categories

in the 2012 Deloitte Best Company To Work For

survey.

Strate would like to thank FNB for the wonderful

gesture as well as the company chef for baking

these delicious treats.

STRATETALK 6www.strate.co.za

Strate selects TCS BaNCS for Fixed IncomeDepository operations

December 2012

Strate will be deploying the Market Infrastructure solutionfrom the TCS BaNCS product suite to replace its currentlegacy Bond Market System, UNEXcor. TCS provides businessapplication solutions to financial institutions globally, leveraginga comprehensive product portfolio under the brand name ofTCS BaNCS.

The solution will provide Strate with the ability to adopt multipleBIS settlement models along with a flexible framework tocater for market-specific requirements designed to maximisesettlement efficiency. In line with global trends, the solutionprovides comprehensive support for both nominee andbeneficiary accounts, thereby providing Strate with the abilityto smoothly transition to an SOR (Securities OwnershipRegister) market model. As part of the implementation, theinterfaces for the Bond Market System will also be refreshedwith ISO standard messages.

The multi-asset class capability and the ability to plug-in newcomponents for value added services make TCS BaNCS agood, long-term strategic choice.

TCS, being a trusted partner of Strate for over 14 years inproviding best-in-class IT solutions, with this new engagement,will prove its superior commitment to customers in deliveringsolutions in a sustained manner and add continuous valueand business benefits.

Commenting on the selection of TCS BaNCS, Monica Singer,CEO of Strate, said: “This choice was a natural outcome ofa long partnership with TCS as they have demonstrated deepunderstanding of our business over the years and deliveredwith certainty. Their product fits into our landscape and futurestrategy. We aim to raise the efficiency bar, post thisdeployment for Fixed Income Depository Operations.”

Mr N. Ganapathy Subramaniam, President of TCS FinancialSolutions, said: “TCS has played a strong role in the evolutionof the settlement infrastructure in the South African marketsince the inception of Strate and in making it world class. Theselection of TCS BaNCS at Strate further vindicates ourcommitment to the market and to our solution being best-in-class, in alignment with the strategic direction of our keycustomers. We look forward to taking our strong relationshipwith Strate to the next level in value delivery with thisProgram.”

STRATETALK 7

Euroclear opens a Segregated Depository Account atStrate

www.strate.co.za

December 2012

One of Europe's providers of post-tradeserv ices, Euroc lear , has opened aSegregated Depository Account, allowingfor the legal record of ownership to berecorded at CSD level.

“Asset safety is increasingly becoming animportant criterion for both local and foreigninvestors. Following the collapse of LehmanBrothers and MF Global, the focus onreducing the risks associated with holdingsecurities has grown substantially. SDAssignificantly and conveniently enhance thesegregation and portability of investors'securities,” explains Monica Singer, the CEOof Strate.

Euroclear has a number of segregatedaccounts with CSDs in Asia, Europe, Africaand America. Countries where these accountshave been opened directly at CSD-levelinclude Austria, Belgium, Denmark, Finland,France, Germany, Greece, Hungary, Ireland,Italy, Luxembourg, Malaysia, Mexico,Norway, Slovenia, locally in Strate, Sweden,The Netherlands and The United Kingdom.

Singer adds: “Having an international clientjoin other prominent institutions that haveopened SDAs at South Africa's CSD hashighlighted how the market is workingtogether towards improved levels oftransparency and risk mitigation, ultimatelyto achieve greater resilience and stability inthe financial market.

It is with solutions like the segregation ofaccounts that are held at an independent,neutral third party, such as the country's CSD,that makes South Africa more attractive tothe international investment community.”

SDAs have been operational in the SouthAfrican market for over a year and aresupported by the country's legislation, as theamended version of the Companies Act(2008) allows for enhanced legal protectionfor investors.

Clients who wish to open an SDA at Stratecan contact Leigh Bevis, Head ofStakeholder Relations at Strate, viaLeighB@strate.co.za or telephonically on011 759 5466.

The 71st SegregatedDepository Account (SDA)has been opened at Strate.

Seventy one safekeepingaccounts have been openeddirectly in the books of Strateby clients both locally andoverseas.

With asset safety top of mindfollowing the Global FinancialCrisis, more clients are openingthese segregated depositoryaccounts at the CSD level. Asa result to have quicker accessto their assets in the event ofinsolvency proceedings, shouldtheir custodian fail as LehmanBrothers or MF Global overseasdid so.

With the segregation of theirassets, their account would notbe frozen and the investorcould continue trading in thataccount in a relatively seamlessmanner as the SDA allowsthem to engage with analternate custodian at shortnotice.

STRATETALK 8

Strate has joined a number of international organisations, aswell as four other prominent South African companies, todevelop a technical framework for Integrated Reporting by2013. It is one of over 80 organisations that are involved in thepilot phase of the International Integrated Reporting Council's(IIRC's) programme, which will be used by companies acrossthe world, according to Hannes van Eeden, Strate's ChiefFinancial Officer and Company Secretary.

The IIRC states that there is 'a growing realisation that they[investors] need better quality information from businesses toenable a more efficient allocation of capital. There is also agrowing body of research, which shows that greater transparencycan improve a company's access to capital’.

“South Africa is in many ways a leader in corporate governanceand sustainability, with Mervyn King chairing the IIRC. King iswell-known for chairing the King Committee on CorporateGovernance in South Africa, which published the King I, II andIII Reports on Corporate Governance in the country,” says vanEeden.

Underlying the Code of Governance Principles as contained inKing III are principles of accountability, integrity and transparency.The King III Code on Governance defines an integrated reportas 'a holistic and integrated representation of the company'sperformance in terms of both its finance and its sustainability'.

“The Pilot Programme forms part of a broader internationalinitiative and Strate, is excited to be part of it,” saysvan Eeden, who adds that Strate has already published itsthird Integrated Report.

The Pilot Programme is the IIRC's innovation hub, whichencourages and facilitates the evolution of corporate reporting.It aims to lead to businesses adopting Integrated Reporting,supported by institutional investors, regulators and standardsetters. The International Federation of Accountants (IFAC)has called for the G-20 countries to support the IIRC'sdevelopment of the Framework.

Van Eeden adds: “Integrated Reporting calls for moretransparent disclosure and communicat ion with al lstakeholders, evolving from the traditional reports on financialstatements to holistic informative reporting, thereby supportingthe needs of stakeholders, companies and regulators.

Following the Global Financial Crisis, stakeholders questionedthe reporting, disclosure, risk exposure and sustainability ofcompanies going forward. Transparency and risk have becomekey themes throughout global markets.”

“It is a global market and companies can't operate in silos. Theyneed to work towards a common goal to strategically addressthe needs of its stakeholders in a structured and transparentapproach. Not only will the information required and reflectedin the Integrated Report direct companies by impacting theirprocesses, it will break down the silos and help drive efficiencies.The standardised Integrated Reporting guideline will also bedeveloped with the aim of becoming a reliable internationalframework to enhance Integrated Reporting holistically,”concludes van Eeden.

On 26 September, the IIRC marked the first anniversary ofthe launch of its Pilot Programme by holding a majorinternational conference, which Strate attended, and publishinga Yearbook to showcase the business and investor journeytowards Integrated Reporting.

South Africa at the forefront of Integrated Reporting

www.strate.co.za

December 2012

STRATETALK 9www.strate.co.za

December 2012

The infamous largest passenger liner of its time, the RMSTitanic, promised the world it would not sink and yet itspowerful design still was no match for the iceberg that sentit to its underwater grave. Similarly, there were those financialentities who claimed that they were too large to fail, yet collidedwith a devastating crisis that saw them sink as quickly as theTitanic.

While entities that clear, settle and record financial transactions(known as Financial Market Infrastructures (FMIs)) withstoodthe effects of a financial meltdown, international standard-setting bodies are making sure that FMIs can endure anyfuture stress scenarios and are stepping up their game to re-enforce risk management defence systems.

FMIs use sophisticated, world-class systems to handleconsiderable transaction volumes and monetary values on adaily basis. They strengthen markets and cultivate economicgrowth and financial stability but, it must be noted, alsoconcentrate risk as some of their activities are centralised.

As FMIs manage, reduce or eliminate certain risks in themarket, it is essential that they are managed properlythemselves. This is why the Committee on Payment andSettlement Systems (CPSS) and the Technical Committee ofthe International Organisation of Securities Commissions(IOSCO) have released 24 new best practice guidelines toeffectively address new risks and drive further efficiencies.

These guidelines are set to be adopted by a number ofinternational markets as the Group of Twenty (G-20) FinanceMinisters and Central Bank Governors, of which South Africais a member, having previously endorsed the new CPSSIOSCO Principles.

With South Africa financial market development ranked thirdin the World Economic Forum's latest Global CompetitivenessReport, the sector always looks at adopting the latest bestpractice to have it benchmarked against international standards.

Five key types of FMIs have been identified by CPSS IOSCOin its Principles. These are:

• Payment Systems (PSs), which are systems that have a set of instruments, rules and procedures for the transfer of funds between or among participants;

• Central Securities Depositories (CSDs), which provide central safekeeping services, asset services and securities accounts;

• Securities Settlement Systems (SSSs) that transfer and settle securities, most of which have infrastructure that facilitates the delivery of securities into the name of the new owner at the exact moment that payment is made;

• Central Counterparties (CCPs) are introduced between counterparties to contracts that are traded in one or morefinancial market, becoming a buyer to every seller and a seller to every buyer; and

• Trade Repositories (TRs), which is an entity that maintainsa centralised electronic record of transaction data to enhance transparency in the market.

The Principles look at the general organisation from a legal,risk management and governance point of view. It then looksat the FMIs credit and liquidity risk management, by lookingat collateral and margins, for example. Other items addressedinclude settlement, default management and efficiency, toname a few.

The table on page 10 below gives a fair indication of theguidelines that will specifically be applicable to differentFMIs. It is intended to depict the applicability of the Principlesfor each different design and type of FMI as defined by CPSSIOSCO. It is important to note that it is possible for an FMI toperform more than one type of FMI function and this wouldneed to be taken into account when determining whichpar t icu lar Pr inc ip les wi l l be appl icable to them.

New CPSS IOSCO Principles are leaving nothing to chance

STRATETALK 10www.strate.co.za

December 2012

Table 1General applicability of principles to specific types of FMIs

Source: BISMore information on the individual CPSS IOSCO Principles can be downloaded via http://www.bis.org/publ/cpss101a.pdf.

PRINCIPLE

General organisation1. Legal basis2. Governance3. Framework for the comprehensive management of risks

Credit and liquidity risk management4. Credit risk5. Collateral6. Margin7. Liquidity risk

Settlement8. Settlement finality9. Money settlements

Central securities depositories and exchange-of-value settlement systems10. Physical deliveries11. Central securities depositories12. Exchange-of-value settlement systems

Default management13. Participant-default rules and procedures14. Segregation and portability

General business and operational risk management15. General business risk16. Custody and investment risks17. Operational risk

Access18. Access and participation requirements19. Tiered participation arrangements20. FMI links

Efficiency21. Efficiency and effectiveness22. Communication procedures and standards

Transparency23. Disclosure of rules, key procedures, and market data24. Disclosure of market data by trade repositories

PSs

•••

••

•

••

•

•

•••

••

••

•

CSDs

•••

••

•

•••

•••

••

•

SSSs

•••

••

•

••

•

•

•

•••

•••

••

•

CCPs

•••

••••

••

•

•

••

•••

•••

••

•

TRs

•••

•

•

•••

••

••

STRATETALK 11

A number of advances have been made with Legal EntityIdentifiers (LEIs) since September that will change the waycompanies do business in the near future.

The LEI system will depend on self-identification and self-registration, according to the Financial Stability Board. TheFinancial Stability Board responded in late October to requestsfor early clarity and guidance on the number allocation schemefor the global LEI system. Experts explored the advantages anddisadvantages of different schemes.

It said that while there is a range of different schemes to managethe issue of identifiers that fit the characteristics of the 20-digitcode (including two check digits) approach outlined in the ISO17442 standard, for simplicity those schemes can be categorisedinto two general groups:

• An unstructured numbering system - one where an 18 character unique identifier fills the whole numbering spectrum;

• A structured numbering system - one where subsets of the spectrum of possible codes are partitioned for efficient allocation according to a structural guideline. For instance, an N digit prefix could be assigned to each local operating unit for its exclusive use.

The Financial Stability Board concluded that the best approachand required method would be to use a four-character prefixallocated uniquely to each local operating unit for characters 1-4, followed by two reserved characters set to zero for characters5-6. Characters 7-18 will include the entity-specific part of thecode generated and assigned by local operating units accordingto transparent, sound and robust allocation policies and characters19-20 will have two check digits as described in the ISO 17442standards.

The Financial Stability Board's Implementation Group, incollaboration with a number of vested parties, will prepare acomprehensive legal and operational analysis, standards andprotocols in the coming weeks. This will support the rapidoperational implementation of the global LEI system. It had beenwaiting for the Regulatory Oversight Committee (ROC) to beformed and the global LEI foundation operating the CentralOperating Unit to be in place. The G-20 Finance Ministers andCentral Bank Governors endorsed the Charter of the ROC forthe Global LEI System on 5 November 2012.

Strate will keep you updated with future developments relatingto the LEI.

Advances in the LEI code

www.strate.co.za

December 2012

STRATETALK 12www.strate.co.za

Principles to further reduce counterparty risk inClose-Out Netting agreements under way

December 2012

From 1 to 5 October, the International Institute for the Unificationof Private Law (Unidroit) met to consider draft Principles onClose-Out Netting, a tool that South African institutions use toreduce exposures to the insolvency of a counterparty.

About 40 countries, including South Africa, do allow Close-OutNetting. However, it is done on different terms. This makesagreements complicated when parties sit in different jurisdictionswith different laws and rules, increasing the risks associatedto such agreements. As such, Unidroit has set up meetingswith the aim to finalise the Principles, which will provideguidelines to legislators on how to amend national insolvencyand Close-Out Netting laws so as to be compatible with eachother.

Financial institutions frequently use collateral to reduce theirexposure to counterparty risks. However, they also have theoption to use Close-Out Netting agreements, which allows aparty to terminate all outstanding contracts between itself andthe insolvent party, calculate the losses and gains on eachcontract and then offset them so that only a balance is owing.

According to Unidroit, the doubt as to the enforceability ofClose-Out Netting agreements in a cross-jurisdictional contexthas negative repercussions on the risk assessment of financialinstitutions. “If a Close-Out Netting agreement were to be heldto be unenforceable by a court, the other party might facesevere financial losses and fall insolvent itself. If the same typeof Close-Out Netting agreement is used in a wider market,such effects can even become systemic,” its report states.

Established in 1926 as an independent intergovernmentalorganisation, Unidroit studies private and commercial law andprepares uniform law instruments, principles and rules for theneeds of different States and groups of States so that it canmodernise and co-ordinate the laws to find harmony betweenthe legislation of different territories.

As a member country, South Africa endorses various Principlesset by Unidroit. It is to be expected that the country may adoptthe Principles once they are finalised. Adopting the Close-OutNetting Principles is especially important considering theconcerns globally of the stability in international markets. Theover-reported stories of the financial crisis may have becomestale, yet the reality is the financial sector is still suffering theconsequences over four years later and markets continue theirvolatile journey of recovery. As such, Unidroit says that

regulatory authorities (most recently, the Financial StabilityBoard and the Cross-border Bank Resolution Group of theBasel Committee on Banking Supervision) “strongly encouragethe use of close-out netting arrangements (alongside collateral)because of their beneficial effects on the stability of the financialsystem. As these techniques are capable of reducingcounterparty risk, both collateral and close-out netting are alsotaken into account to determine a financial institution's capitalratio under the Basel II and III Accords.”

Following a number of study groups made up of legal expertsin financial markets, Unidroit has endorsed the proposal of theSecretariat to convene a Committee of governmental expertsfor further consideration and finalisation of the Close-Nettingdraft Principles for adoption by the Governing Council. It plansto meet in March 2013 following its first session of the Committeeof governmental experts that took place in the first week ofOctober 2012 in Rome, Italy.

Dr Maria Vermaas, who is the head of the legal and regulatorydivision of Strate, serves as vice chairperson and a memberof the drafting committee on the Unidroit convention onintermediated securities and was appointed the chairpersonof a Unidroit Committee of Governmental Experts to considerthe draft Principles on Close-Out Netting.

STRATETALK 13

In October, employees who form part of Strate's 2012 MentorshipProgramme purchased 150 trees in the Eastern Cape to createa Strate Forest for National Arbour Week, with the help ofCarbonWorx South Africa.

The CarbonWorx initiative focuses on specifically rebuildingecosystems with forest projects to help reverse global warmingby planting trees in strategically targeted areas that lack forests.Current areas identified in the Eastern Cape are Ngqungqu,Thungwana, Mahlamvu, Zanci, Mahlungulu, Nganaseni andMgomanzi.

Strate chose to plant a number of 6-litre trees that are greaterthan the number of people it employs, such as the CommonHook Thorn, Mi lkwood Tree or Forest MahogonyTree. This will not only restore local ecosystems, but also makethe planet a better place to live for future generations.

Strate creates a forest in the Eastern Cape

www.strate.co.za

December 2012

Strate Charity Shares (SCS), an innovative scheme designedto get rid of unwanted odd-lots of JSE-listed shares to help avariety of needy causes, this week donated R100 000 - in allR400 000 - to four worthy causes.

To date, SCS has raised over R2 million and donated it to arange of charities.

Beneficiaries of the current contribution are:• African Children's Feeding Scheme;• Bethany House Trust;• Child Welfare SA; and• Child Welfare Tshwane.

“We experience much gratification from each payment we areable to make from SCS,” says Monica Singer.

The funds contributed to SCS are derived from share donationsby investors, usually in the form of odd-lot paper sharecertificates, which SCS then aggregates, dematerialises andsells. Lost share certificates and unclaimed dividends may alsobe donated. Donations can be deducted from taxable income,as the scheme is registered under section 18A of the IncomeTax Act.

Tom Wixley, SCS chairman, explains the motivation: “The costof selling such shares frequently exceeds their value, butbecause of the generosity of Strate, Computershare,PSG and others, we are able to get the full value free of cost.Hence, by donating those odd-lots to charity, investors notonly rid themselves of assets that are little more than nuisancevalue but they contribute toward the upliftment of the nation'sless fortunate.

”The win-win situation presented by SCS is raising substantialsums of money, thereby offering charitable bodies a source offunds that would not otherwise have been available to them."

SCS continues to sol ici t donations from investors."The co-operation of all CSD Participants, brokers and transfersecretaries in assisting in the donation processing is greatlyappreciated, as is the pivotal role that Strate has played inrunning the scheme," says Wixley.

Even so, he believes considerably more could be done tocreate a greater awareness of the initiative.

For further details, queries and/or donations contact theStrate Charity Shares toll free help line on 0800 202 363.If you are phoning outside South Africa, you may call +2711 506 4713. SCS donations may be made through theinvestor's stockbroker as well.

Innovative share charity scheme has raised overR2 million for a host of worthy South African causes

STRATETALK 14

On Monday, 5 November 2012, Richard Gray Cottrell passedaway unexpectedly. Mr Cottrell was the former Chairman ofStrate's Regulatory and Supervisory Committee and anIndependen t Non -Execu t i ve D i rec to r o f S t ra te .

Mr Cottrell will be remembered for his invaluable contributionto the South African financial markets. According to BeverleyFurman, the Head of STRATE Supervision, the creation ofSTRATE Supervision back in 2001 can be attributed to the

leadership and dedication of Mr Cottrell. “His constantwillingness to share knowledge and experience in thesupervision and regulation of financial markets has beeninstrumental to Strate and our industry.”

Mr Cottrell completed his tertiary education at StanfordUniversity and qualified as a Financial Chartered Accountant.He became a Chartered Accountant of South Africa in 1957.From 1984 to 1995, he served as a Managing Partner of Coopersa n d L y b r a n d S o u t h A f r i c a , a p r e d e c e s s o r o fPricewaterhouseCoopers Inc. and served as the President ofthe Institute of Chartered Accountants. After retiring frompractice, he became Executive Officer of the Financial ServicesBoard in 1996.

Mr Cottrell served on numerous boards as an IndependentNon-Executive Director including Glenrand MIB Ltd, NedcorBank Limited, Munich Reinsurance Company of Africa Limitedand Strate.

On behalf of Strate, we would like to extend ourcondolences to Mr Cottrell's family and friends.

In memory: Richard (Rick) Gray Cottrell

www.strate.co.za

December 2012

Strate engages and connects with its stakeholders throughvarious means, including the social media arena. With over500 million 'users' on Twitter and 150 million members onLinkedIn, there is a growing emphasis on digital communication.

St ra te 's Twi t ter , L inkedIn and Facebook pro f i les(entitled Strateltd) provide up-to-date information about thefinancial markets and CSDs internationally. This includes industry groups, such as the Tri-Party Collateral ManagementGroup on LinkedIn, which shares the latest news articles onthis topic.

LinkedIn is referred to as the business version of Facebookwhere business people can connect with one another to engageon research topics and information, including industrywhitepapers, corporate events and thought leadership articles.

Like Facebook, users may 'connect' to likeminded businessesand people as your profile is linked to your CV and careerinformation.

Twitter is a platform that allows users to share messages of140 characters (letters, spaces, punctuation marks and thelike) as well as pictures and videos with followers. This is calledmicro-blogging and on Twitter, you can choose to follow aperson or entity to get real-time news and information as ithappens. Twitter has become extremely popular as a way tokeep abreast of information or find interesting articles andresearch. You can follow any person or entity on Twitter andnot require their approval as the information is public.

Last year, Facebook had over 750 million active users withonline profiles used to share status updates, photos, theirwhereabouts and other information with friends. Users cansearch for other people online and connect to friends, family,colleagues and businesses (which will need to be accepted bythe other party to confirm the connection in most instances).

Strate looks forward to engaging with our stakeholders ontheir platforms, which can be found at www.linkedin.com,www.twitter.com and www.facebook.com respectively.

Social media 101

STRATETALK 15

In the Strate tradition of a paperless environment, we will be distributing electronic cards. Thesavings on printing and postage have been donated to Ebenezer Care Centre – a home fordestitute adults and children south of Johannesburg.

STRATETALK 16

Follow Strate Ltd

Tel: +27 (11) 759 5300 • Fax: +27 (11) 759 55001st Floor, 9 Fricker Road, Illovo Boulevard, Illovo, Sandton, 2196, South Africa.

Email: info@strate.co.za • www.strate.co.za

December 2012

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