The national Treasury has released new statements regarding upcoming financial regulations in the new year, among them a tightening of currency trading and capital control regulations following the currency rigging scandal, and a change in the methodology of estimating national spending.

Additionally, the Treasury aims to initiate a new Sharia-law compliant “sukuk”, or Islamic banking certificate, to facilitate trading with Gulf countries’ Islamic banking systems. BNP Paribas, despite being embroiled in the currency-rigging scandal, was named as a joint lead manager in the sukuk program.

Currency trading

On Friday, the National Treasury expressed concern over Standard Chartered Bank's admission of misconduct in trading Rands/US Dollars between 2007 and 2013, a scandal which involves JP Morgan and Bank of America, as well as French BNP Paribas and the local Investec.

Standard Chartered Bank has agreed to pay an administrative penalty of R42,715,880, a rather marginal fee at the scale of their operations, which is unlikely to affect their bottom line or the standing of their operations.

Other banks under investigation deny wrongdoing and challenge allegations. National Treasury expressed the need for patience and respect for ongoing legal processes, and awaits the conclusion of the Competition Tribunal.

Financial Sector Regulation Act (FSRA) and regulations aim to ensure fair treatment and ethical standards in financial institutions, but the Treasury has been working with ruling party legislators to develop tighter guidelines.

The new Conduct of Financial Institutions (COFI) Bill in 2024 aims to enhance control over South African financial markets by bringing “over the counter” (OTC) derivative providers (those that do not trade on public asset exchanges, but work directly with investors) under COFI licensing activities.

Spot market reforms for OTC merchants are under consideration in the review of the Financial Market Act Bill (FMAB). The FMAB draft proposes including foreign currency in the definition of "security" and extending market abuse provisions by imposing licensing regulations and defining “applicable security in the following way:

“(a) a security made available for trading on a trading venue or a foreign trading venue.  

(b) any benchmark or derivative instrument related to, or whose price or value is dependent on, a security referred to in paragraph (a).”

Treasury also clarifies that the wrongdoing by Standard Chartered Bank between 2007 and 2013 did not massively influence the current depreciation trend of the currency, which is largely affected by corruption, crime and other local governance failures, as well as the policies of the US Federal Reserve.

Budget estimation

The new budget estimation guidelines do not offer dramatic shifts in the methodology, but do impose a few changes for tracking certain targets required by national policy frameworks and international treaties.

The Estimates of National Expenditure (ENE) brochure sets out the expected budget outcomes on a rolling three-year basis, though historically, the government has overspent and underperformed almost all previous targets.

Under the new guidelines, the inflation calculations will once more be updated, as the government tries to hide the real effects of inflation with each year, tweaking the metrics to achieve the most favourable statistical reports.

The report notes concern about the wage bill, which failed to contain public expenditure in line with required targets.

The additional tracking parameters' include “gender responsible governing” to track public wages and welfare impact with respect to gender, “climate budget tagging” to bring government statistical outputs in line with CO2 quotas established by international climate agreements, and science and technology innovation targets, to track developments of research and development sectors.

Sukuks

With the introduction of the new Sukuk investment portfolio, the government aims to expand its bond market into the Islamic world, and increase its debt to Gulf countries like Saudi Arabia and the UAE.

Sukuks, following Sharia law, are not allowed to charge interest in the traditional manner of Western standard government bonds, but instead sells investors a coupon-like certificate, which the investor then proceeds to use to purchase an asset that the investor group has direct partial ownership interest in.

Strictly speaking, the sukuk may not be used for “speculative” investment, since that would void the Sharia compliance of that asset. But the nature of modern markets are speculative at heart, so the boundaries tend to be blurry.

Essentially, this means that investors in the sukuk steer the investment of the fund, while receiving the profit generated by that fund. This allows investors to share in the ownership of the assets acquired and the money spent, while exerting influence over the direction the money goes.

The RSA Domestic Sukuk Trustee facilitated the landmark ZAR20.386 billion transaction, introducing Senior Unsecured Shari’ah Trust Certificates in the domestic capital markets.

The Certificates consist of four tranches with varying maturities, listed on the JSE's Interest Rate Market. The transaction was 1.74 times oversubscribed, attracting diverse investor demand, including South African banks and international Islamic funds.

The Sukuk launch follows the Government's funding strategy outlined in the 2021 budget, and aims to fill the government’s budget requirements, which are already strained by current debts, and failure to contain the public sector wage bill.

Rand Merchant Bank, BNP Paribas, and The Standard Bank of South Africa Limited were appointed as Joint Lead Managers for the Sukuk, despite continuing concerns over BNP Paribas’s role in the currency-rigging scandal.

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