What progress has been made?

On 24 February 2023, South Africa was placed on the Financial Action Task Force (FATF) list of “jurisdictions under increased monitoring” (more commonly known as its ‘Greylist’). This was based on the October 2021 Country Report that identified certain areas of non-compliance (NC) and partial compliance (PC). As a reminder, the FATF has a list of 40 recommendations¹, where members are expected to achieve satisfactory levels of compliance. The other levels of compliance are largely compliant (LC) and compliant (C).

As per the October 2021 report, South Africa had five areas (out of 40) of non-compliance, 15 areas of partial compliance, 17 areas of being largely compliant and three areas of being fully compliant. South Africa was then given time to address these concerns, however, we couldn’t do so adequately in the time given and were subsequently added to the Greylist on 24 February 2023. For those looking for a more detailed refresher, please refer to our March 2023 article.

Update and progress

During October 2023, the FAFT conducted an exercise to determine the progress we have made since being added to the Greylist. These findings² were subsequently published in November 2023. Based on this report, South Africa seems to have made significant progress in addressing most of the concerns. Most notably, no areas of non-compliance were identified, and the areas of partial compliance decreased from 15 in our previous report to only five in the latest progress report. The below graph provides a visual representation of the overall progress made. As can be seen in Exhibit 1 below, South Africa’s entire “distribution” has shifted to the right, which is where we want it to be.

This is very positive, however on two of the recommendations (R) – R.2 and R.32 – we have not made sufficient progress. Let’s delve a bit deeper into what still needs to happen.

Recommendation 2 (R.2) – currently rated partially compliant (PC)

The first two general recommendations (R.1 and R.2) of the FATF both focus on Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT), with R.2 emphasising the importance of national cooperation and coordination. Specifically, the recommendation requires that countries should have AML/CFT/CPF policies in place which must be informed by a risk-based approach, regularly reviewed and that should designate an appropriate authority that coordinates such policies. Countries should also ensure that those responsible for policy creation, financial intelligence, law enforcement, supervisory actions and other relevant authorities can cooperate and coordinate their efforts as well as exchange information.

From the feedback in the updated report, it seems that South Africa is still lacking in its coordination and holistic implementation of AML/CFT efforts across the major relevant and responsible parties. The inability to appropriately integrate our AML and CFT policies and coordinate amongst different parties ultimately constrains the effectiveness of the policies.

Recommendation 32 (R.32) – currently rated partially compliant (PC)

This recommendation is all about Bearer Negotiable Instruments (BNI) or “paper documents which have monetary value to the individual possessing them and are in a form where ownership or title passes upon delivery”³.

Before we delve into recommendation 32, it’s worth defining BNI’s a bit more simply. Those of you who might recall Bruce Willis running around barefoot in the Nakatomi building trying to save the day all by himself in the movie Die Hard might also remember that the bad guys were after negotiable bearer bonds.

Negotiable bearer bonds are basically untraceable paper bonds and whoever holds them in their hands becomes the owner. This is also one of the obvious reasons why they are so popular among criminals. Of course, the most popular BNI is simply cash.

R.32 deals with how we manage, monitor and restrict BNI (cash) coming into and out of South Africa. South Africa will therefore have to implement additional measures to effectively manage how cash enters and exits our country’s borders and address the notion that South Africa has become a very convenient hub for criminals and their various networks and syndicates to funnel their proceeds through.

While we have made some significant progress across the board, we need to urgently address these two recommendations along with those recommendations still classified as only partly compliant.

The hope is that we address this during 2024, however, it’s going to be a very busy year ahead. Legislators are nearing the end of their term in office, campaigning for reelection and will have to wait and see who will eventually end up in our new 28th Parliament.

In his State of the Nation address on 8 February, President Cyril Ramaphosa stated that steps have been taken “including through new legislation, to strengthen our ability to prevent money laundering and fraud and secure our removal from the “grey list” of the Financial Action Task Force. According to the President, a digital forensic capability has been set up to support the NPA Investigating Directorate, which in due course will be expanded to support law enforcement more broadly. He further added that “legislation is currently before Parliament to establish the Investigating Directorate as a permanent entity with full investigating powers.”⁴

Thus far, it appears that Greylisting has had a limited impact on our financial markets. Bond yields are trading at similar levels to where they were before the announcement. Although the current levels of the JSE ALSI are slightly off, when compared to the levels at the end of 2022, these are acceptable.

One could argue that should we not address the outstanding concerns timeously and therefore stay on the greylist longer than expected, capital markets might be inclined to demand a further increase in our risk premium. We have most certainly seen additional administration and operational difficulties when it comes to enhanced due diligence procedures which has led to increased overall time spent and transaction costs.

¹Source: FATF (2012-2023), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, FATF, Paris, France, www.fatf-gafi.org/en/publications/Fatfrecommendations/Fatf-recommendations.html

²Source: FATF (2023), Anti-money laundering and counter-terrorist financing measures – South Africa, 2nd Enhanced Follow-up Report, FATF, Paris. https://www.fatf-gafi.org/content/fatf-gafi/en/publications/Mutualevaluations/south-africa-fur2023.htm

³Source: FATF (2010), Global Money Laundering and Terrorist Financing Threat Assessment, FATF, Paris, France, Money Laundering vulnerabilities of Free Trade Zones (fatf-gafi.org)

⁴Source: President Cyril Ramaphosa SONA speech on 8 February 2024.

Following the February 2023 greylisting by the Financial Action Task Force (FATF), South Africa has been diligently working on an Action Plan to address 22 strategic deficiencies in its Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime.

The latest FATF Plenary meetings in February 2024 confirmed significant progress, with five action items now addressed and 14 partly addressed out of the 22. However, three items remain unaddressed.

National Treasury acknowledges the progress but emphasizes the challenge of meeting all remaining action items by the February 2025 deadline.

Additionally, South Africa has made notable strides in addressing technical compliance deficiencies, with 35 out of 40 FATF recommendations now fully or largely compliant.

Please click here to view the media statement.  

Attention SAIFM Members,

We wish to inform you of the latest communication from the Financial Sector Conduct Authority (FSCA) regarding the Requirements for rule amendments to be submitted by retirement funds in accordance with the Two-Component System outlined in the Revenue Laws Amendment Bill and the Pension Funds Amendment Bill.

This communication outlines the FSCA’s requirements and approach regarding rule amendments to implement the two-component system, aimed at addressing challenges related to retirement fund asset preservation and access during financial distress or emergencies.

Members interested in understanding the detailed requirements and transitional arrangements are encouraged to review the full communication from the FSCA dated 16 February 2024, available here.

Should you have any further inquiries, please contact Ms. Fikile Mosoma at Fikile.Mosoma@fsca.co.za.

Thank you for your attention to this matter.

As is customary, I am sharing some key compliance tips for the year ahead. South Africa has witnessed a significant evolution in its regulatory landscape, with further change on the way.

Here are four key compliance considerations to keep in mind in 2024.

1. COFI: A game-changing acronym

The introduction of the Conduct of Financial Institutions Act (COFI) will mark a pivotal moment in South Africa’s financial regulatory landscape. I am not brave enough to predict an effective date, however, we can reasonably expect promulgation during the course of 2024.  COFI aims to consolidate and streamline the current sectoral approach of financial sector regulation, focusing on customer-centric market conduct. Key considerations for compliance under COFI include enhanced transparency, fair treatment of customers, and the obligation of financial institutions to act in their customers’ best interests. Though it creates further compliance requirements, COFI is an important step in enhancing trust and stability in the financial sector.

2. ESG is imperative, even if you’re over it

Investors, consumers, and regulators are increasingly emphasising the importance of sustainable and responsible business practices that align with Environmental, Social and Governance (ESG) principles. Companies operating in South Africa need to align their strategies with ESG principles, addressing environmental impact, social responsibility, and effective governance. It might seem like old news, but it’s important to recognise the sustainable journey financial services contributes to the overall well-being of society and the world.

3. Ignore AI at your peril (and keep crypto considerations in mind)

Integrating Artificial Intelligence (AI) into operations is essential in the fast-paced world we find ourselves in, improving operations and saving time. Ignoring what AI could do for your business will set you back behind the curve in times to come.

Digital assets such as cryptocurrency, continue to gather pace, despite the risks. We see several jurisdictions such as the UK,  seeking to become a crypto-friendly hub and share in the revenue streams.  Digital tokens are not going away, and while investing in crypto still requires caution, there is at least a firmer compliance hand in play to safeguard investors than was the case in the past and this trend will likely continue.

Crypto asset service providers in South Africa had to apply for a license to operate under FAIS and to comply by the end of November in 2023, or risk facing naming, shaming and incurring fines or other sanctions.

4. Grey that hasn’t gone away

South Africa is firmly on the radar of the Financial Action Task Force (FATF), while various local regulatory authorities actively work to enhance anti-money laundering and combating the financing of terrorism (AML/CFT) measures. Clear communication and collaboration with global regulatory bodies will help to navigate this challenge and strengthen our regulatory framework.  Politicians will likely be focused on the election, but it will require progress on the FATFs guidelines in 2024 if there is any chance of reaching the government’s goal of getting off the greylist by 2025. As well as to ensure key legislation, like COFI, gets enacted.

By proactively aligning operations with regulatory themes as above your business will be best placed to face the future, and can also contribute to the growth and stability of South Africa’s financial sector.

I wish you all the best for a productive 2024.

• BCBS-IOSCO publish a report on streamlining variation margin processes and the responsiveness of initial margin models in non-centrally cleared markets.
• The report sets out eight recommendations to encourage the implementation of good market practices but does not propose any policy changes to the BCBS-IOSCO frameworks.
• The recommendations address challenges that could inhibit a seamless exchange of margin and collateral calls in stress periods and highlight good practices for making the Standard Initial Margin Model (SIMM) more responsive to extreme market shocks.

The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) on 17 January published a Report on streamlining VM processes and IM responsiveness of margin models in non-centrally cleared markets, which sets out recommendations for good market practices to enhance market functioning. Interested parties are invited to comment on this report.

In September 2022 the BCBS, the BIS Committee on Payments and Market Infrastructures and IOSCO published a Review of margining practices. Today’s consultative report articulates the policy analyses work carried out by the BCBS-IOSCO in two areas discussed in that report: (i) exploring the need to streamline variation margin processes in non-centrally cleared markets; and (ii) investigating the responsiveness of initial margin models in non-centrally cleared markets.

The consultative report sets out eight recommendations to encourage the widespread implementation of good market practices but does not propose any policy changes to the BCBS-IOSCO frameworks.

The first four recommendations aim to address challenges that could inhibit a seamless exchange of variation margin during a period of stress. The other four highlight good practices for market participants to smoothly implement initiatives to ensure the calculation of initial margin is consistently adequate for contemporaneous market conditions and proposes that supervisors should monitor whether these developments are sufficient to make this model responsive enough to extreme market shocks.

The Committee and IOSCO invite submissions on the proposals, which should be submitted by email to baselcommittee@bis.org, and margin@iosco.org by 17 April 2024. All comments will be published on the Bank for International Settlements and IOSCO websites unless a respondent specifically requests confidential treatment.

The Board of the International Organization of Securities Commissions (IOSCO) on 26 January 2024 published a consultation report on Post Trade Risk Reduction Services (PTRRS), which identifies potential policy considerations and risks associated with the use and offering of PTRRS associated with over-the-counter (OTC) derivatives trades, and presents sound practices as guidance to IOSCO members and regulated users of PTRRS.

IOSCO is seeking to better assess the risks associated with the increased use of PTRRS and concentration of PTRRS providers, particularly in the areas of portfolio compression and counterparty risk optimisation.

The Consultation Report notes that PTRRS offer important benefits, including post-trade operational efficiencies, reduction in counterparty risk and, potentially, an overall reduction in systemic risk.

However, PTRRS may pose a number of challenges and risks. For instance, risks relating to market concentration of service providers, a lack of transparency regarding the algorithms used by providers, and a lack of meaningful due diligence by users of PTRRS. Further, while PTRRS are widely used in many jurisdictions, there is limited data received by regulatory authorities, in addition to either limited or no direct regulatory oversight of PTRRS.

Kevin Fine, Chair of IOSCO’s Committee on Derivatives (Committee 7) said “PTRRS play an increasingly significant role in the efficient functioning of OTC derivatives markets. It is important that IOSCO understands both the benefits and the evolving risks associated with the use of PTRRS, the challenges that market participants face in using such services, and whether there are ways to improve market practices.”

IOSCO is seeking input from market participants on the discussion question in the report as well as the proposed sound practices. Comments on the consultation report should be sent to consultation-01-2024@iosco.org on or before 1 April 2024.

• BCBS-CPMI-IOSCO call for interested parties to comment on ten policy proposals which aim to improve central clearing participants’ understanding of initial margin calculations and potential future margin requirements.
• The report proposes that central counterparties (CCPs) should provide additional public disclosures on their margin models and increase the sophistication and accessibility of margin simulation tools.
• Clearing members should provide greater transparency to clients and the CCPs of which they are members.

The Basel Committee on Banking Supervision (BCBS), the Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) on 16 January 2024 jointly published a consultative report Transparency and responsiveness of initial margin in centrally cleared markets – review and policy proposals. Interested parties are invited to comment on this report.

The ten policy proposals in the report aim to increase the resilience of the centrally cleared ecosystem by improving participants’ understanding of CCPs’ initial margin calculations and potential future margin requirements.

The proposals cover:

• CCP simulation tools: Margin simulation tools with certain minimum functionality should be made available by CCPs to clearing members and their clients.
• CCP disclosures: CCPs should disclose additional information related to their margin models including on anti-procyclicality tools. CCPs should also report certain public quantitative disclosure elements in a more timely and frequent manner.
• Measurement of initial margin responsiveness: To facilitate the monitoring of margin requirements by clearing members and their clients, CCPs should disclose a standardised metric for measuring initial margin responsiveness.
• Governance frameworks and margin model overrides: CCPs should implement enhanced analytical and governance frameworks for margin models. When CCPs use discretion to override model margin requirements, this should be done within a publicly disclosed analytical and governance framework.
• Clearing member transparency: Clearing members should provide greater transparency to their clients and the CCPs of which they are members. Additionally, they should develop enhanced analytical frameworks for assessing margin responsiveness when passing on margin calls to clients.

This consultative report has been developed pursuant to publication of the BCBS-CPMI-IOSCO Review of margining practices in 2022. In addition to this consultative report published on 16 January 2024, there will be two further upcoming reports, a BCBS-IOSCO report Streamlining VM processes and IM responsiveness of margin models in non-centrally cleared markets and a CPMI-IOSCO report Streamlining variation margin in centrally cleared markets – examples of effective practices.

The Financial Stability Board (FSB) is also conducting work to develop high-level, cross-sectoral policy proposals on non-bank market participants’ liquidity preparedness to meet margin and collateral calls. The FSB will publish a consultative report in the first half of 2024.

The BCBS, CPMI and IOSCO invite input on the consultative report by 16 April 2024. Responses should be sent via email to the Secretariats of the BCBS, CPMI and IOSCO (baselcommittee@bis.org; cpmi@bis.org; margin@iosco.org).

Responses will be published on the websites of the BIS and IOSCO unless respondents expressly request otherwise. Commercial or other sensitive information should not be included in the submissions, or may be included, with redactions for publication clearly noted.

SAIFM, under the guidance of our Board and its Chair, Adam Reeves, has thoughtfully reviewed the FSCA Draft Conduct Standard for Managers of Collective Investment Schemes. We appreciate the opportunity to share our insights.

In our review of the FSCA Draft Conduct Standard, SAIFM emphasizes the need for:

•             Clarity on the definition of “Authority.”

•             General guidance on proportionality.

•             Clear guidelines for taking action against distributors.

•             Acknowledges the user-friendly format.

SAIFM is willing to assist in addressing the gap in specific qualifications for managers. For a comprehensive understanding of SAIFM’s input on the FSCA Draft Conduct Standard, please see the full comments document here.

SAIFM remains committed to contributing constructively to the enhancement of the financial regulatory landscape.