Presented by Jenny Meyer ***Corporate Governance rated zaAg by CA-Ratings Attracting Foreign Investment through the Harmonisation of Global Legal & Regulatory.

Presented by Jenny Meyer

***Corporate Governance rated zaAg by CA-Ratings

Attracting Foreign Investment through the Harmonisation of Global Legal & Regulatory Environments and

other pertinent considerations

Introduction

The sharp decline in financial markets worldwide in the wake of a series of major corporate governance failures has shaken public confidence in the integrity of global capital markets.

To restore public confidence presents a major challenge for policy-makers, regulators and financial services providers alike.

In addition to measures aimed at - improving governance, legal and regulatory compliance, financial reporting, transparency, and management accountability for corporations,

special efforts targeted at the role of financial institutions and institutional investors are also required.

Introduction

The pace of regulatory change is increasing faster than ever.

There has never been a more challenging time globally for those in the financial services industry responsible for ensuring that their business has policies and systems in place to comply with all elements of relevant regulations.

This compliance challenge also falls to those responsible for designing systems and operational controls for business and senior management of regulated financial services companies.

Regulators are increasingly holding these professionals accountable to ensure that such systems and controls are in place and are appropriate to the business of a regulated financial services firm.

What attracts foreign investment in an emerging market?

Factors:

Investability on the basis of financial criteria;

Monetary and fiscal transparency;

Corporate governance;

Political stability;

Labour practices;

Shareholder and creditor rights and activism;

Compliance and risk management strategies;

Market friendly environment for investment liquidity;

Investable universe – exposure to finance and real estate;

What attracts foreign investment in an emerging market?

Factors: (contd)

Quality of regulatory requirements;

Stability of SA’s institutions;

JSE’s level of share trading;

Foreign ownership of local shares;

Sound business practices;

Recent upgrade of SA’s sovereign status from rating agencies;

An upgrade from “advanced emerging” national ranking to “developed countries” rating by FTSE Group – would give SA significant prestige as investment destination.

How does SA measure up on the Regulatory and Supervisory Front? What progress have we charted?

Regulation and Supervision

The FSB has developed new guidelines, and revised existing ones, to improve efficiency in supervising financial institutions and enhance consumer protection.

Despite legislation, the need for consumer awareness and diligence is now greater than ever.

The poor performance of equity markets has rapidly diminished investment returns, which is threatening the capital of insurers and retirement funds alike.

Due to popularity of investment-linked policies and conversions to defined contribution schemes, individual savers have been hard hit.

This potential social problem is exacerbated by a chronically low savings pool, making it all the more difficult for investment managers to weather stormy market conditions and mitigate losses from occasional corporate scandals.

There needs to be greater active board participation, devotion of quality time to corporate affairs and emphasis on substance over form in board meetings.

There is consensus among supervisors that improved market discipline and transparency are necessary to ensure stability in world financial markets and reduce systemic risks.

Increased co-operation between, and appropriate training of supervisors is of growing importance.

Internationally, supervisory institutions have acknowledged this, and in our region there are a number of initiatives involving extensive co-operation among supervisors.

In response to recent incidents involving accounting firms certifying incorrect annual financial statements, financial regulators worldwide have extended their supervisory focus to conduct and market discipline.

While market conduct focuses on issues of transparency in institutions and in the organisation of financial markets, market discipline is more about incentives and availability of information.

SA corporates largely still lack ability to incentivise management to act appropriately in the long-term interest of the firm and its shareholders.

This is exacerbated by SA’s fairly low level of shareholder activism.

Regulation and Supervision

Capital Markets - Development in SA – an Industry Overview

JSE Securities Exchange:

The JSE Securities Exchange South Africa (“JSE”) is currently the only licensed Stock Exchange in SA;

In August 2001, the JSE took over the business operations of the South African Futures Exchange (“SAFEX”), which became the Financial Derivatives Division (“FDD”) and the Agricultural Products Division (“APD”) of the JSE.

Capital Markets – Performance Indicators

At 31 March, there were 566 individuals who were members of the South African Institute of Stockbrokers (2002: 729) practising in 66 equities member firms (2002: 75 firms).

The number of companies with shares listed on the JSE totalled 463 (2002: 535).

Turnover of shares (including off-order book trades) for the year ended 31 March 2003 was an all-time record and amounted to R818,8 billion (2002: R635,1 billion), made up from approximately 3,6 million trades.

In Rand terms this was 28,9% higher than the previous year. The average number of trades per day was 14 266 (2002: 16 099). New equity capital raised on JSE amounted to R57,8 billion which was

84% more than the R31,4 billion raised in the previous year. Liquidity, measured on the basis of equity turnover as a percentage of

market capitalisation, amounted to 37,1% for the year compared to 38,4% in the previous year.

Market capitalisation of all securities listed on the JSE amounted to R1 446,1 billion at 28 February 2003, ranking the JSE as the 17th largest stock exchange in the world in terms of market capitalistion (2002: 18th).

Capital Markets - Warrants

Warrants are long-dated put or call options and are issued by a third party on individual or baskets of securities of listed companies. As at 31 March 2003, there were 263 warrants listed (2002: 542).

There are five warrant issuers active in the SA market.

The total value of trades in warrants for the year ended 31 March 2003 amounted to R5,1 billion (2002: R12,1 billion).

Capital Markets – Derivatives Division of the JSE

The Financial Derivatives Division (“FDD”), which covers the individual equity futures and options, has been in operation since 1990.

This FDD traded 27 billion contracts for the year ending March 2003, representing approx a 23% decrease compared to the 35 million contracts traded for the year ending March 2002.

The turnover value of R740,5 billion for the current year reflects a substantial decrease of 29% compared to the same period of review in the previous year (R1 049 billion).

The Agricultural Products Division (“APD”), which covers commodities futures and options on maize, sunflower, wheat and soybeans was formed in 1995 and has established itself as a thriving operation.

The majority of the trades on the APD are in white maize derivatives.

Capital Markets – Central Securities Depositories

The Central Depository Ltd (“CD”)

The CD was established in 1991 as the first central securities depository in SA to –

immobilise certificated bond securities; and enable the transition from physical to electronic settlement.

An associate company, Universal Exchange Corporation Ltd (“UNEXcor”) is the clearing house appointed by BESA, and provides the market’s clearing and settlement infrastructure and the depository systems of the CD.

Capital Markets- STRATE Limited (Share Transactions Totally Electronic)

The FSB registered STRATE Ltd, the central securities depository for equities, in terms of the Custody and Administration of Securities Act, 1992 (“CASA”) on 20 September 1999.

The year under review represents the first full year in which STRATE Ltd has been responsible for the settlement of all trades in listed equities on the JSE.

STRATE Ltd continues to maintain a 100% settlement ratio and this success has contributed significantly to the recognition attributed to STRATE Ltd (and the SA market as a whole) by the international community.

Initiatives in the market to evaluate the impact and effectiveness of shortening the current T+5 settlement cycle and to move to a T+3 cycle during 2004 are continuing.

As at 31 March 2003, in excess of 75% of the total number of JSE listed securities in issue have been dematerialised.

This also equates to approx 76% of the JSE’s total market capitalisation.

In addition to equities, STRATE Ltd undertakes electronic settlement of warrants. This sector of the market is totally dematerialised.

Capital Markets – Further Industry Developments

JSE Securities Exchange South Africa

Introduction of New Trading System, JSE SETS

In terms of an agreement entered into between the JSE and the London Stock Exchange (“LSE”), The JSE SETS trading platform, hosted by the LSE, successfully went live on 13 May 2002.

The FSB approved the new trading rules to comply with the requirements of JSE SETS and to align the JSE with international trading best practice.

Capital Markets - Introduction of New Trading System, JSE SETS

New trading model is based on European Alliance Trading Model and provides for introduction of pre- and post-trade anonymity, auction functionality, lot size of one, showing full depth of order book, enhanced price discovery rules, new closing price methodology and use of price tolerances and volatility auctions.

The trading system seeks to accomplish:

Increasing market liquidity; Ensuring equal access to information; Minimising system complexity for participants; Attracting new and developing current capital flows; Facilitating investor protection; and Enhancing market integrity.

Capital Markets – Introduction of New Information Dissemination System for the JSE

Business agreement JSE signed with LSE provides for each exchange to assist in the marketing of the other’s data.

The JSE has replaced its information dissemination systems on 13 May with a new system, InfoWiz, which is an all encompassing real-time feed for market data and information and will expand the JSE’s global reach.

FTSE/JSE Africa Index Series

FTSE, the global index group, successfully commenced with effect from 24 June 2002, the calculation of the FSTE/JSE Africa Index Series.

It replaced the JSE indices and is based on a free-float system.

Capital Markets – US Regulatory Permission for JSE Futures Contract on the FTSE/JSE Top 40

The Commodity Futures Trading Commission (“CFTC”) has issued no-action letter, permitting offer and sale in US of JSE’s futures contracts based on the FTSE/JSE Top 40 Companies Index.

The FTSE/JSE Top 40 option on futures contract may also be offered and sold in US.

The JSE’s futures contract based on FTSE/JSE Top 40 joins an elite list of futures contracts approved by the CFTC.

This includes futures contracts listed by some of the world’s most competitive exchanges including –

the London International Financial Futures and Options Exchange’s FTSE 100 Index futures contract;

Eurex Deutschland’s Dow Jones Global Titans 50 futures contract; the Hong Kong Futures Exchange’s Hang Seng Index futures contract.

Capital Markets – Establishment of GAAP Monitoring Panel

The JSE in association with the South African Institute of Chartered Accountants (“SAICA”) appointed a panel of specialists to ensure that financial statements of listed companies comply with statements of Generally Accepted Accounting Practice (“GAAP”), as currently required in terms of the JSE’s listings requirements.

This is to bring about greater confidence in the financial reporting structure of issuers.

The step was taken in light of corporate failures and accounting scandals locally and in foreign countries.

As statements of GAAP do not presently have legal support, the Financial Reporting Bill has been submitted to government for promulgation.

Capital Markets – Revised JSE Listings requirements

The JSE’s listings requirements have been comprehensively revised to provide for –

dealing by directors in their own companies’ shares,

closed periods during which directors are restricted from trading in a company’s shares,

requirements regarding the appointment of sponsors, changes in line with the second King Committee report on corporate governance.

Capital Markets – Small Cap Stock Market

A new small cap stock market to be called the Alternative Exchange, a division of the JSE, was launched during October 2003.

This market runs parallel with the JSE’s main board and replaces the Venture Capital Market and the Development Capital Market.

This is expected to save many small cap firms from being forced to delist due to the high costs required to maintain a JSE listing.

Although the listings requirements will not be as onerous on this small cap market, the same standards of corporate governance will apply.

Capital Markets – Merger of Central Securities Depositories

Following discussions on in principle agreement between the shareholders of STRATE Ltd and Unexcor in December 2002 to merge these entities, STRATE Ltd with its board’s unanimous approval made a formal offer on 16 January 2003 to acquire the entire business of Unexcor and CD Ltd as a going concern.

Finalisation of this transaction is dependent on a favourable due diligence investigation by STRATE Ltd into Unexcor and CD Ltd, along with the approval of the FSB and the support of the Competition Commission.

The merger entity aims to become the preferred provider of financial market clearing and settlement services in the Southern African region.

Capital Markets – Settlement of Money Market Instruments

The Money Market Forum finally ruled on their request for proposal for the dematerialisation of the money market instruments in SA, which was awarded to CD Ltd.

The merged entity will assume responsibility for the Money Market dematerialisation development.

Introduction of an Electronic Share Register

An initiative to evaluate the feasibility of introducing a centralised Electronic Share Register has commenced and will continue into the year ahead.

Capital Markets – Legislative Developments

Securities Services Bill

The Securities Services Bill will consolidate the -

Stock Exchanges Control Act, 1985, Financial Markets Control Act, 1989, Custody and Administration of Securities Act, 1992, and the Insider Trading Act, 1998.

It will also amend certain provisions of the Companies Act, 1973.

The main effect - FSB will be empowered to approve disclosure documents, such as a prospectus and a letter of allocation, which a public company submits to the Registrar of Companies for registration.

The Bill has been further revised and has been forwarded to National Treasury for submission to Cabinet and Parliament.

New Legislation

The Collective Investment Schemes Control Act, 2002 (“CISCA”), signed into law by the President on 13 December 2002, was only brought into effect on 3 March 2003, once the subordinate legislation had been finalised and gazetted.

CISCA introduces a much more modern regulatory regime for collective investment schemes including, inter alia, added investor protection mechanisms, improved disclosure requirements and enhanced enforcement powers for the Registrar.

The Financial Advisory and Intermediary Services Act.

The Financial Intelligence Centre Act.

Capital Markets – Regulatory Co-operation Abroad

The FSB has signed the following two bilateral Memoranda of Understanding (“MOU’s) with regulators of foreign jurisdictions:

Hellenic Capital Market Commission, Greece on 9 October 2002; China Securities Regulatory Commission, China on 29 October 2003;

These MOU’s are aimed at facilitating and improving exchange of information for co-operation and enforcement between securities regulators of different countries.

This brings the total number of MOU’s signed between the FSB and other jurisdictions to 37.

Capital Markets – Regulatory Co-operation Abroad

FSB complies with international standards on the exchange of information and enforcement with foreign regulatory authorities in the interest of fair, efficient and transparent securities markets.

The FSB is also a member of the following IOSCO Committees and Task Forces:

IOSCO Objectives and Principles Implementation Committee;

Multilateral Memorandum of Understanding Steering Committee and a verification group thereof;

Emerging Markets Committee Advisory Board;

Task force on Islamic Capital Markets;

Co-ordinator for the Implementation of IOSCO’s Objectives and Principles for its Africa/Middle East Region.

Corporate Governance seems to be the new “buzz” word - it is not a new concept.

Been around for an inordinately long period of time. We’ve merely attached a convenient label to it.

King II has ably and diligently crystalised basic principles into a guideline to assist sound business management, highlighting need for:

Sound corporate practices;

Accountability;

Sustainability;

Transparency.

Corporate governance can be defined as the system by which corporations are directed and controlled.

Corporate Governance


Corporate governance should facilitate:

the achievement of common sense business objectives;

effective business and risk management;

establishing and maintaining good relations with shareowners;

ensuring reasonable and sustainable returns;

consideration for employees;

strong relations with suppliers and customers;

environmental practices that take all stakeholders into consideration; and

compliance with applicable laws and regulations.


No longer sufficient to only focus on the bottom line financial issues.

A recent study conducted at Stanford Law School to examine the relationship between corporate governance behaviour and market value showed that institutional investors are much more likely to invest money in companies that have good corporate governance practices in emerging economies than they would be to invest money in companies that have bad corporate governance practices even if these companies were in first world, booming economies.

What can investment managers do to attract foreign investment?

Investor confidence has been badly dented by falling markets accompanied by corporate scandals. The areas that investment managers must tackle include:

a) correcting weaknesses in the control environment, monitoring of third party vendors, compliance programmes,

b) building trust by improving transparency and facilitating comparison of funds and track records,

c) usage of Total Expense Ratios (“TERs”) and performance presented in compliance with GIPS. Other measures for greater transparency producing internal control (eg SAS 70) reports, and open communication about remuneration and governance procedures, and

d) enhancing the solution the investment product provides and how it fits into the investors’ risk and liability horisons.

Products should meet customers’ needs,

More sophisticated work needs to be done on understanding, articulating and meeting investor risk appetites,

Helping customers consider risk in their asset allocation - currently an area of focus in the US.

What can investment managers do to attract foreign investment?

Particularly with institutional clients, an important aspect is increasing the transparency and comparability of information.

In Asia, there is increasing use of investment performance presentation compliance services, such as GIPS and AIMR-PPS from local players competing with international investment managers for overseas clients.

In North America, managers continue to find that clients are focusing on relative risk. In the bull markets of the late 1990’s, clients wanted to invest in “hot” sectors without taking portfolio risk into account.

After two years of bear market returns, managers are spending much more time reviewing the benefits of a balanced portfolio, balancing investment objectives, client risk appetite and portfolio weighting.

Asset Managers grow their business through growing their clients

Compliance and World Trends Strategies

Major trend focuses on efficient and effective compliance systems as a means of limiting operational risk and escalation of compliance problems and risk to senior management level in terms of accountability.

Appropriate governance structures.

This trend has led to Sarbanes-Oxley in the US and the Higgs Report and various predecessor reports and recommendations on corporate governance structures and board accountability and independence in the UK.

Limiting operational risks is seen in both the proposals of the Basel Committee and the FSA for firms to adopt a series of qualitative principals in order to limit operational risks.

Change management

Interesting elements of the Basel and FSA proposals on managing operational risk is the focus on managing change within regulated firms.

Ability of the firm to show that its compliance and regulatory control infrastructure is capable of adaptation to deal with new regulations as they arise.

Data Cleansing

Business governance in the form of new regulations has been increasingly focusing on market data management and market data cleansing as an area of concern for risk management compliance.

Data Storage

Global regulations cover three main areas:

Basel II will require robust systems to support the collection, storage and analysis of vast amounts of data; while

the SEC regulations set out requirements for out of region disaster recovery and online retention of e-mail;

Sarbanes-Oxley specifies requirements for financial reporting.

Conclusion

The days of the bull market created a haven for investment managers and an environment in which profitability seemed effortless.

This is now a memory, and maybe it was never quite as easy to do well as it appeared to be.

Falling markets have coincided with increasingly stringent regulation.

A more aggressive posture has been taken by regulators, liquidators and politicians on industry specifics ranging from capital adequacy to market timing.

In addition, new issues like corporate governance have emerged on the landscape requiring significant attention and focus by management and directors.

How then do we attract foreign investment in SA?

Conclusion

The global scenario and best practice should prevail, and although important to align and harmonise the global legal and regulatory environments that will make the mechanics of investing more certain and familiar, other factors are pre-requisite and need to be factored in, such as:

growth potential; consumer markets; cheap and skilled labour; freedom to remit capital and income back to source country stable

political environment; sound economic management – low national debt to GDP and low

inflation; favourable tax regime; strong financial sector; efficient legal system.

Asset managers have a role to play and international best practice, corporate governance, risk management principles can and should be universally applied.