Is Strate too dominant?

SA's only settlement service for listed securities, Strate, has enjoyed dominance for almost 10 years, but now there are rumblings of discontent from market players.  Ruan Jooste reports on their complaints.

For close on a decade, Strate, SA's electronic settlement service majority-owned by the JSE, has been the only game in town.

Though its operations aren't always understood by the non-investor, it plays a crucial role as it is responsible for the settlement of every listed security. This makes it central to the healthy functioning of SA's financial market.

There is no real alternative to the service it provides, and issuers of JSE-traded products have had to suffer its dominance as SA's only central securities depository (CSD).

But now there are rumblings of dissatisfaction as other market makers question Strate's hold over them.

In recent months:

There has been an outcry over fee increases for 2013 from issuers, forcing Strate to back down on a proposed 15% hike, the fourth successive increase of this magnitude;

The opaqueness of its pricing has been challenged;

Market players say Strate's self-regulatory regime is prejudicial;

Market players say there is no effective policing of Strate as the Financial Services Board (FSB) to which it reports has no teeth; and

Its close relationship with the JSE helps it dominate the market.

When issuers were informed of another 15% annual increase to their total costs, they were also told that future hikes would be in that region.

They complained to the FSB and, after the outcry, Strate backed down, reducing issuer fees to 6%, which is closer to consumer price inflation (CPI).

Norman Muller, the FSB's head of department for capital markets, confirms that the FSB received a complaint on issuer fee increases, but says it has no power to prescribe fees to self-regulatory organisations, including Strate and the JSE. "Fees have to be reasonable and in line with inflation, but we do understand that Strate provides a lot of services to issuers," he says.

However, the setting of fees must follow a specific process in terms of the law, which includes consultation with the public and the FSB.

Strate is the only licensed CSD and is subject to the Securities Services Act, under the authority of the FSB, and some parts of the Companies Act.

Nigel Redford, company secretary of Super Group, says issuers were lucky to get an increase close to CPI. "We are operating in a tough business environment; contractual increases from our customers are normally CPI or less," he says.

He says Strate is in effect a monopoly with the power to levy substantial fees and pass on abnormally high increases. "Because our stock trades on the JSE - and with no other alternative - we have no choice in using Strate services," says Redford. "But the onus is on Strate and the JSE to be fair and transparent in their pricing.

"It is not always clear what costs are levied for what service," he adds. "It is difficult for us to look at our costs in isolation."

In addition to clearing and settlement services, Strate administers issuers' corporate actions and nominees and provides various forms of beneficiary reports, for which it charges.

The opaqueness of pricing is evident in a charge to issuers of 90c/trade - up from 71c/trade this year - described as a "transaction fee per JSE trading system trade". The directive does not make it clear why Strate would levy a cost on gross trades as it works on a net settlement basis. Nor does it explain why it is charging issuers for transactions in which neither the issuer nor Strate is involved.

Redford accuses it of double-charging.

"We have already been charged transaction fees by the JSE when investors buy and sell our shares; now we get charged a second time - and we are also charged several times for receiving the same data," he says.