ollowing the financial crisis, the financial markets internationally as well as locally have been in an unprecedented phase of change which makes it very difficult to stay up to date with the latest developments. This issue of SA Financial Markets Journal will hopefully contribute to clarify some of the more complex local and international regulatory issues, but also explore other market and economic developments of interest.

The incongruous effect of own-credit-risk adjustments on the earnings of a number of international banks is explored. The question is posed whether banks should consider hedging their own-credit risk since own-credit spreads will be an ongoing source of earnings volatility.

The dangers of under-managed counterparty risk and the potential destabilising effect thereof on financial systems are worldwide under discussion. Collateral requirements for the OTC derivative markets as a risk mitigation tool are explored.

South Africa’s growing public debt is scrutinised. The current or initial debt-to-GDP ratio, the primary fiscal balance, the government bond yield and the growth rate in the nominal GDP, are used in in fiscal calculus to predict whether a country could be heading for a debt trap situation. Some European countries have succumbed to effects of fiscal profligacy and the fiscal calculus is applied to gauge the possibility of a similar fate befalling South Africa in years to come.

Changing consumer preferences and investor attitudes as a result of environmental issues, particularly climate change, is another factor that demands the attention of asset managers and financial advisers. Businesses may have to adjust the environmental impact of their products and services due to mounting public pressure. 

The possible impact of the revised regulation 28 under the Pension Funds Act is also considered. The conclusion is that it may unintentionally lead to the consolidation of retirement funds as a result of the increase in costs and the complexity of compliance.

In South Africa, it is exciting news that the JSE will introduce a new trading system that will provide faster execution of trades. As high frequency trading grows, this will become increasingly important to ensure that South Africa remains competitive. The JSE has also embarked on a new Africa strategy to grow its investment offering from the rest of the continent as demand for African investments continues to rise.

The South African financial market regulators’ response to the international regulatory developments is set out broadly in the new Financial Markets Bill that has been tabled in Parliament. A brief summary of the most interesting and notable changes to the status quo is provided.
Another investor protection initiative is introduced by STRATE. Segregated Depository Accounts will provide a safe-keeping account structure for investors to safeguard them from the possible collapse of an intermediary or custodian.
The consequences of the financial crisis and the perceived regulatory failures will probably dominate headlines for many years. The regulatory and economic interventions being implemented are by no means guaranteed to restore the world economy to its state prior to 2007. It is indeed likely that many initiatives, especially those pertaining to the regulation of OTC derivatives will be a hit and miss affair. Market analysts, economists and regulators will have to keep a sharp eye out for unintended consequences so that corrective action can be taken timeously.

By Christo Lüus
Chairman - SAIFM