PRESENTATION BY FINANCIAL SERVICES BOARD TO PCOF THE SECURITIES SERVICES BILL, 2004

1. PRESENTATION BY FINANCIAL SERVICES BOARDTO PCOFTHE SECURITIESSERVICES BILL,2004

2. TOPICS TO BE ADDRESSED • Background • Ambit • Objects • Application • Prohibitions • Structure • Conclusion

3. BACKGROUND • Policy Board reviewed regulatory framework in 1998 • Legislation outdated • Legislation does not comply with best international practice • FSB established drafting team in1998 consisting ofrepresentatives of:

4. BACKGROUND • FSB • Licensed Exchanges • Banking Council (South Africa) • CSD’s • Other stakeholders

5. BACKGROUND • Cognisance was taken of IOSCO’s objectives and principles of securities regulation and other regulatory practices • Foreign legislation - UK, Australia, European Directive, etc.

6. BACKGROUND • Various drafts of the SSB were submitted to the FMAB in 2000 & 2001. The FMAB approved the Bill in principle at its meeting of 9 March 2001 • On 4 May 2001 the Policy Board for Financial Services and Regulation approved the Bill

7. BACKGROUND • Bill was submitted to Cabinet in May 2002, but subsequently withdrawn from the process by the Minister and revised by National Treasury and the FSB • Bill was resubmitted and approved by Cabinet on 23 June 2004

8. BACKGROUND • We consulted with all interested parties • None of the parties was opposed to the Bill • Most of the comments were accepted and incorporated • Bill was displayed for a considerable time on the FSB’s website • The list of persons & institutions consulted is available

9. AMBIT • Will consolidate the - • Stock Exchanges Control Act, 1985: JSE • Financial Markets Control Act, 1989: BESA & JSE • Custody and Administration of Securities Act, 1992: STRATE Ltd • Insider Trading Act, 1998 • Will repeal these Acts • Also adds new provisions to thoseActs

10. AMBIT • Since the repealed Acts were approved by Parliament, it is unnecessary to refer to or explain those clauses of the Bill that essentially reiterate the provisions of the repealed Acts

11. OBJECTS • Increase confidence in the SA financial markets by: • requiring that securities services are provided in a fair, efficient and transparent manner • contributing to the maintenance of a stable financial market environment

12. OBJECTS • Promote protection of regulated persons and clients • Reduce systemic risk • Promote international competitiveness of securities services in the RSA

13. APPLICATION • Exchange and authorised users (members) • CSD and participants • Clearing house • Person trading unlisted securities • Issuers of securities • Clients of authorised users and participants • Market abuse - insider trading and market manipulation

14. PROHIBITIONS • Exchange needs to be licensed: Renew • CSD needs to be licensed: Renew • Clearing house needs to be licensed: Renew • Authorised user needs to be authorised by the exchange i.t.o. exchange rules • Participant must be accepted by CSD • Business of trading listed andunlisted securities - must complywith Bill

15. PROHIBITIONS • Authorised user must comply with exchange rules to manage securities • Management of investments by non-authorised users is regulated by the Financial Advisory and Intermediary Services (FAIS) Act

16. STRUCTURE • The Bill confers the status of a SRO on exchanges and CSD’s • The Bill is structured in 9 chapters • Emphasis is placed on significant legislative changes and new principles

17. CHAPTER 1:PRELIMINARY PROVISIONS • Objects and application of Bill and prohibited activities • Concepts common to the whole Bill are defined • Following definitions warrant special attention:

18. DEFINITION OF EXCHANGE • Person who constitutes, maintains and provides an infrastructure: • For bringing together buyers and sellers of securities; • for matching the orders for securities of multiple buyers and sellers; and • whereby a matched order forsecurities constitutes atransaction

19. DEFINITION OF SECURITIES • Definitions of “securities” and “financial instruments” in the SECA and FMCA respectively, have been consolidated into one definition of “securities” • The definition excludes money market instruments (except for purposes of Chapter 4)

20. DEFINITION OF SECURITIES • The Registrar may declare a security; and • may also declare a security included in the definition of securities not to be a security

21. DEFINITION OF REGULATED PERSON • A SRO or any other person who provides securities services

22. DEFINITION OF SECURITIES SERVICES • Services provided in respect of – • Buying and selling of securities • Custody and administration of securities • Management of listed securities by an authorised user • Clearing & settlement oftransactions in listed securities

23. CHAPTER 2: REGULATION & SUPERVISION OF SECURITIES SERVICES * Functions of the Registrar/Deputy Registrar of Securities Services - In performing those functions, the Registrar must have regard to a number of issues

24. CHAPTER 2: REGULATION & SUPERVISION OF SECURITIES SERVICES • Financial Markets Advisory Board - May on its own initiative, and must, at the request of the Min. or Registrar, investigate and report or advise on matters re regulated persons or the provision of securities services

25. CHAPTER 3: EXCHANGES • Licensing • Any person may apply for an exchange licence, not only an association • Exchanges are subject to the same basic requirements • However, the registrar may determine to what extent an applicant must comply with those requirements • Provision is not made for different tiers of markets, each with its own separate set of requirements

26. CHAPTER 3: EXCHANGES • Applicant must have insurance, a guarantee or compensation fund orother warranty to enable it to provide compensation to clients of authorised users

27. FUNCTIONS OF AN EXCHANGE • Registrar may assume responsibility for certain exchange functions • The provisions on the listing of securities have become more onerous, e.g. the listing requirements are binding not only on an issuer and an authorised user, but also on their directors, officers, employeesand agents • Bill provides for the closure of a board

28. RULES OF THE EXCHANGE Contrary to current requirements, the Bill requires exchanges to make rules for: • Approval of a nominee of an authorised user • Settlement of disputes between authorised users and between them and their clients • Manner in which complaintsagainst an authorised user must be investigated

29. RULES OF THE EXCHANGE • To provide for the supervision by an exchange of compliance with the duties imposed on it and its authorised users by the Financial Intelligence Centre Act, 2001.

30. OFF-MARKET TRANSACTIONS INLISTED SECURITIES • This is allowed between financial institutions, on condition that they transact with each other as principals. “Financial institution” is defined for this purpose.

31. REPORTING OF OFF-MARKET TRANSACTIONS IN LISTED SECURITIES • Must be reported to the Registrar • Registrar must disclose the information to the exchange on which the securities are listed • Registrar must also disclose the information to the public, unless the Registrar is satisfied that suchdisclosure will be contrary to theobjects of the Bill

32. TRADING OF UNLISTED SECURITIES • It is not required for people who carry on the business of buying & selling unlisted securities to be approved or licensed. • However, the Registrar may prohibit a person from carrying on such business, or may impose or prescribe conditions in respectof such business

33. UNDESIRABLE ADVERTISING AND CANVASSING RELATING TO SECURITIES • No person, other than an authorised user or its officer or employee who is so permitted in terms of exchange rules, may advertise or canvass for the business of an authorised user

34. CHAPTER 4: CUSTODY & ADMINISTRATION OF SECURITIES Licensing of a CSD • CSDs will not be registered in future, but will be licensed and its licences will be renewed annually Acceptance of participants • To prevent unnecessary duplication, it will no longer be a requirement for the registrar to approve a participant of a CSD as a depositary institution before the CSD may accept that institution as a participant

35. CHAPTER 4: CUSTODY & ADMINISTRATION OF SECURITIES Approval of nominees • The Bill provides for the approval of nominees that act as the registered holders of securities on behalf of other persons • A nominee not approved In terms ofexchange/CSD rules, must be approvedby the Registrar

36. CHAPTER 4: CUSTODY & ADMINISTRATION OF SECURITIES • Uncertificated securities - The Bill enables the conversion of all types of certificated securities (not only equity securities) to uncertificated securities, as well as the issuing of uncertificated securities

37. CHAPTER 5 : GENERAL PROVISIONS APPLICABLE TO SROs • SRO is defined as an exchange or a CSD • Renewal of licences • Licence of CSD needs to be renewed annually in line with the approach applicable to exchanges

38. DEMUTUALISATIONOF SROs • The Bill provides for the demutualisation of SROs and the amalgamation of two or more exchanges or two or more CSDs – the Registrar must prescribe conditions • Most of the members of the World Federation of Exchanges are in the process of demutualisation

39. APPOINTMENT OF MEMBERS OF CONTROLLING BODY OF SRO • Duty of care and skill owed by directors and executive officers to SRO • No person who does not qualify ito the SSB, may be appointed as a member of the controlling body of a SRO

40. APPOINTMENT OF MEMBERS OF CONTROLLING BODY OF SRO • SRO must within 14 days of the appointment of a new member to its controlling body, inform the Registrar and furnish the Registrar with the required information • The Registrar may under certain circumstances instruct the SRO to remove that member from its controlling body

41. LIMITATION ON CONTROL IN SROs • The Registrar’s approval is required for the acquisition of shares in a SRO (company or close corporation) – • if the aggregate nominal value of those acquired shares will amount to more than 15% of the total nominal value of all the issued shares of the SRO • If that person holds shares which entitle him to exercise more than 15% of the voting rights attached to the issued shares

42. LIMITATION ON CONTROL IN SROs • If that person has the power to determine the appointment of more than 15% of the directors of the SRO • Purpose – to prevent disreputable people from controlling a SRO and thereby introducing systemic risks into our securities markets

43. AMENDMENT OF RULES • A SRO will have to provide the Registrar with explanations and reasons for proposed rule amendments • The period for objections has been reduced from 30 to 14 days to expedite the approval of rule amendments

44. CHAPTER 6:CLEARING HOUSE • Clearing houses need to be licensed (annually renewed) if this function is not performed in-house by an exchange • Currently the FMCA provides for the recognition of a clearing house • Amalgamation or transfer of clearing house – two or more clearing houses may amalgamate or merge with one another or with any SRO

45. CHAPTER 7:CODE OF CONDUCT • The Bill requires the Registrar to prescribe a code of conduct • The Bill prescribes the basic principles for the Code • The Code is binding on authorised users, their officers, employees and clients

46. CHAPTER 8:MARKET ABUSE • Insider trading can now be committed by any person. • Person defined to include a trust.

47. MARKET ABUSE • A sub-section has been allocated for each prohibition together with the defences that relate to the specific prohibition.

48. MARKET ABUSE • The defence that an insider “would have acted in the same manner even without the inside information” has been removed.

49. MARKET ABUSE • New defence introduced namely “the insider only became an insider after he/she had given the instruction to deal to an authorised user, and the instruction was not changed in any manner after he/she became an insider.

50. MARKET ABUSE • The defence that an insider was acting on specific instructions from a client is now available only to authorised users.