Archive for the 'Custody' Category

Regulated blockchain and commodity exchanges coming to Mauritius

GMEX Group is leading in plans to launch a revolutionary blockchain exchange platform in Mauritius with MINDEX Holdings Limited (MINDEX) linked to Mauritius International Derivatives and Commodities Exchange and Hybrid Stock Exchange Corporation Limited (HYBSE).

The new bourse will be called HYBSE International Marketplace. The partners are:
• MINDEX: a complete exchange, post trade and physical infrastructure, facilitating a variety of asset classes to be traded in Mauritius, supported by GMEX
• GMEX: a world leader in digital business and technology solutions for exchange and post-trade operators. GMEX serves as core of a network of stock exchanges and other trading and post-trade centres around the world.
• HYBSE: a global online marketplace based on blockchain technology that is part of the DIM-Ecosystem.

Daniel Liu of HYBSE and Hirander Misra of GMEX Group

According to the press release:
“The HYBSE International Marketplace will integrate blockchain solutions and technology with traditional financial industries providing a complete and governed ecosystem that digitalizes assets onto the Blockchain. This partnership will for the first time, enable institutional investors access to cryptocurrency ETF’s and other crypto-instruments.
“The following asset classes will be facilitated for trade in a digital tokenized format:
• Cryptonized shares
• Cryptonized currencies
• Commodities
• Indices
• Forex
• ETCs (Exchange-traded commodities)
• ETFs (Exchange-traded funds)
• CETFs (Crypto exchange-traded funds)

“SMEs (small and medium enterprises) will be able to use the HYBSE International Marketplace to seek capital by launching an Initial Blockshare Offering (IBO); a time-limited offer to purchase cryptonized-equities and other cryptonized-instruments, such as blockshares, from businesses registered on the HYBSE International Marketplace at special discounted rates.”

The decision to set up in Mauritius follows news that the regulator FSC will create new licensable activities for the Custodian of Digital Assets and Digital Asset Marketplace – see consultation paper issued in November 2018 – and provide a regulated environment for the exchange and safe custody of digital assets. The regulator in Mauritius has also issued guidelines on investment in cryptocurrency as a digital asset.

Hirander Misra, CEO of GMEX Group, commented: “He added, “We welcome the new regulatory framework for digital assets in Mauritius and we are thrilled to be at the forefront of market development as one of the first ventures to set up under the new regime. We are firmly convinced that there is a massive opportunity for Mauritius to position itself as a major global hub in this dynamic space underpinned by strong governance and regulation to ensure trust”.

In a blog post he noted that Mauritius has also set up a National Regulatory Sandbox Licence Committee to consider sandbox licensing of fintech activities. “Sham ICOs have to be stopped and robust KYC / AML processes and rules must be put in place. In addition technology if developed and deployed well can ensure that some of the crypto exchange hacks we have heard of in other parts of the world can be avoided. Ultimately the current regulatory confusion will correct itself as there will be a flight to quality to those jurisdictions with robust laws and regulations in place. The unregulated bucket shop exchanges with poor controls will cease to exist, as properly run and secure technology enabled digital exchanges and digital asset custodians come into the market to facilitate increased institutional business and wholesale retail business.”

Commodity platform – gold from mine to vault
In June, GMEX had announced it was part of the initial consortium to launch Mauritius International Derivatives and Commodities Exchange (MINDEX), which will become a multi-commodity and derivatives exchange platform. The Mauritius Financial Services Commission will exercise full regulatory oversight.
GMEX has been working closely with the British High Commission Mauritius and Department for International Trade (DIT) Mauritius since it opened a regional headquarters in Mauritius International Financial Centre (IFC) during 2017.

MINDEX Clearing will act as central counterparty clearing house (CCP) to clear all trades.

The GMEX consortium led investment in the MINDEX project amounts to $35 million to build a gold refinery, a secure vault, launch of an advanced technologically enabled spot exchange, derivatives exchange and clearing house. This is expected to create 104 direct jobs over 2 years and an additional 408 new secondary jobs over the next 2 years in Mauritius.

The Department for International Trade’s Minister for Investment Graham Stuart MP said: “As an international economic department, we are pleased to be working with GMEX in Mauritius on an investment which will sustain and create jobs in Mauritius and the UK. The MINDEX project will support an ecosystem which creates opportunities in gold mining, refining, storage, recycling, and in commodities trading and financial technology.

“We will continue support companies’ overseas investments where there is benefit to the UK by offering practical support to investors, facilitating introductions to ease market entry and using our expertise to explain political sensitivities and cultural differences to British businesses.”

Blockchain, crypto and the changes to stock exchanges in coming 2 years

Hirander Misra of GMEX, speaking at panel organized by lawyers Mackrell Turner Garrett on cryptocurrencies in London on 14 Nov, says: “We get 10 inquiries a week to set up a platform. The bar for setting up a blockchain or crypto exchange is moving much higher. In Mauritius and Abu Dhabi the bar is almost as high as for setting up a normal exchange.

“Digital currency is here to stay, in time some sovereign states will adopt it. In Venezuela, where currency collapsed, people have used bitcoin to get currency out, in Harare people have adopted it. Fidelity and others have started to dip their toes in the water.

“Independent crypto exchanges are opaque, it can be very expensive to get assets in and out. In the last 6-12 months, some of the big custodians have been getting involved, the large banks are going into custody, adopting own products, vaults, etc.

“We talk about ‘decentralized’ but everyone is protecting their own turf, we will end up in worse mess. It can be spaghetti.

“Securities exchanges are very much like they were 25 years ago, standalone, at the time when electronic trading came in. Unless you change you won’t be relevant. There will be change in the next 2 years.

“We still need for regulation and intermediaries, people still want institutions to be accountable. A lot of what we have done in last 30 years is still relevant, our challenge is to make it more efficient.”

GMEX
GMEX Group (GMEX) comprises a set of companies that offer leading-edge innovative solutions for a new era of global financial markets, providing business expertise, the latest technology, connectivity, and operational excellence delivered through an aligned partnership driven approach. GMEX uses extensive market infrastructure experience and expertise to create an appropriate strategic master plan with exchanges, clearing houses, depositories, registries, and warehouse receipt platforms. GMEX also offers the added benefit of interconnection to multiple partner exchanges, to create global networks of liquidity. GMEX Technologies is a wholly owned subsidiary of GMEX Group.

Safeguarding investments – custody banks spur growth of African capital markets

Fast-rising inflows of investment capital to the African markets are spurring an increase in the banks offering custody services. But global players are held back by differences in infrastructure and legal structure in the different markets and the need to reach economies of scale in a low-margin business.
Custodians are responsible for safe-keeping assets. For instance, if a global fund manager wants to invest in different African markets, it might appoint a bank to keep its local holdings of equities or bonds registered in the name of the bank’s local nominee company and to ensure that all is correctly registered and administered including purchases and sales, dividends, voting rights and other actions. They are essential to the progress of institutional investors into Africa.
According to a excellent article by experienced journalist Liz Salecka for FinancialNews.com, the custodians that dominate are “the two pan-African banks”. She writes that demand for custody services is growing fast driven by two factors:
• international institutional investors flocking to take advantage of the region’s growth prospects.
• the rise of pension and unit trust investments as investors grow wealthier and domestic savings institutions increase.
Standard Chartered Bank says capital inflows to sub-Saharan Africa grew 4 times from $13.2 billion in 2003 to $48.3bn in 2012. They are hunting equity, fixed-income and money-market investments in markets such as Kenya, Nigeria, Ghana, Mauritius, Tanzania and Zambia. The article quotes Hari Chaitanya, regional head, investor and intermediaries, Africa, transaction banking at Standard Chartered Bank: “Portfolio equity investment in the region is focused on the most active and liquid stock markets in South Africa, Nigeria, Kenya, Mauritius and Zimbabwe, which the Johannesburg Stock Exchange continues to dominate, accounting for 83% of total market capitalisation in the region in 2012.” He added that, although South Africa will continue to dominate in terms of size, the fastest growth is in other countries. Several African countries are among the fastest growing in the world, with GDP growth rates experienced and foreseen of over 7% a year.
She also quotes Mark Kerns, head of investor services at Standard Bank as saying international investor demand will spur capital markets development: He added: “Domestic demand is also growing as a result of insurance expansion, growth in retail savings and increased pension fund investment in unit trusts and other vehicles as pension systems develop. This, supported by the emergence of a middle class, is further driving stock market growth.”

Who are the African custodians?
Standard Bank, the bank with the biggest operation in African markets, offers custody services in 15 sub-Saharan markets. Standard Chartered Bank, which launched a custodian services business in 7 African markets in 2010 after buying Barclays Bank’s custody business in Africa, has since expanded its network to 11 markets since then.
Global bank Barclays used to have a African custody operation but in line with the rest of its confused Africa strategy decided to sell that off in 2010 to Standard Chartered, according to a 2010 press release. Earlier this year, Standard Chartered also entered into an agreement with South Africa’s Absa Bank (also part of Barclays) to acquire its custody and trustee business.
According to the article, Standard Chartered and Standard Bank are expanding and introducing new services in a major movement to service foreign and domestic investors.
Newer global custodians entering Africa start in South Africa – Societe Generale in 1991 and Citibank in 2011 – and are expanding into new growth markets.
Writer Salecka cites Andy Duffin, head of sales, emerging markets at Societe Generale Securities Services: “If you look back at custody business in Africa, the bulk of it was focused on the South African market, which generated the most significant revenue in the region. However, there is now growing demand for custody products and services in other markets such as Ghana, Nigeria and Kenya, and it is no longer the view that South Africa will generate the most significant revenues.” He says believes existing providers branching out into new markets will drive market development more than new players entering.
Societe Generale Securities Services started operating in Ghana in June 2013, according to a press release. It offers custody services for Ghanaian equities and bonds, foreign exchange and cash-management services to local and foreign investors, frontier-market funds and other players looking for increased exposure to Ghana. “Clients benefit from the local knowledge and expertise of a dedicated SGSS team located within SG-SSB, a subsidiary of Societe Generale group, which is directly linked to the pan-African integrated services platform developed by SGSS in South Africa. This platform will be deployed in other African countries in due course. SGSS already operates in Tunisia and Morocco and was reported to be talking to authorities in Mauritius about access to the local central securities depository, where it also wants to offer custody services. Societe Generale is predominately a provider of securities services in this region, and has increased staff by nearly 50% since 2007.

Sub-custodians
A key feature of institutional investment and African capital markets development over the last 20 years has been sub-custody service for international custodians who want to offer their clients services in different markets without actually setting up operations in each country. This provides a significant component of Standard Bank’s business.
State Street is a leading example of a bank which offers fund administration services from its South African offices in Johannesburg and Cape Town but relies on a network of sub-custodians across the region to service the needs of its global and regional institutional clients. Its partnership with Standard Bank was instrumental in bringing American-regulated institutional investors into many African markets in the 1990s.
He also believes international banks cannot come into Africa just to do custody business.
According to Rod Ringrow, senior vice-president and head of official institutions for EMEA at State Street: “At the moment we are seeing significant inflows into sub-Saharan Africa from large institutional investors – and the flows from our clients will help determine where we want to be.”

Custody and capital markets development
Salecka writes: “The ability of new competitors to enter sub-Saharan Africa continues to be hindered by the challenge of building sufficient scale to operate profitably in a region characterised by diverse, small markets with different regulations… The scope for new entrants to offer custody services in sub-Saharan Africa is also hindered by the complexities involved in meeting the regulatory requirements of individual markets.” She points out that infrastructure is improving, and says there are now 26 central securities depositories across the region, but they all evolve at different paces and a couple of markets including Zimbabwe and Namibia still use outdated paper settlement. Different national regulatory, tax and capital market practices complicate the provision of standardised services.
She cites Standard Chartered’s Chaitanya who says providing custody services in sub-Saharan Africa should be part of a global bank’s wider strategy for the region. New entrants have to prove that they can provide a regional presence and commit to ongoing investment in technology and other infrastructure: “Apart from South Africa, many markets in Africa are still considered too small by many global custodians to establish a physical presence in the region. Hence, the domestic custody market is dominated by regional and local banks. Custody is about scale because it is not a high-margin business.”
Dirk Kotze, Africa banking advisory leader at Deloitte (in Johannesburg) told her many banks should consider whether the market is big enough for them to operate profitably: “They must also consider who are the dominant players and what they would provide to differentiate themselves. Potential new entrants must also look into whether they have clients from other markets that need services in this new market. In addition to providing basic services, custodian banks must be able to help clients understand and navigate their way through local regulatory market environments, which are evolving in line with broader economic growth.”
Standard Bank’s Kerns said: “Emerging and frontier markets are characterised by a number of challenges including the fact that many of them are still in the developmental phase. New entrants need to obtain a banking licence and be familiar with local regulatory and other infrastructure as well as the social and cultural dynamics of each country.”

Where African capital markets want to step up the involvement of international and domestic institutional investors they need to work to provide harmonized technical and regulatory environments for custodians, including information flows. Whether CSDs will eventually be able to take business from custodians remains to be seen, but for the meantime global custodians are key strategic partners for the development of the institutional investors that drive capital markets development.

Why African investors use Depositary Receipts?

Many foreign investors have investments in Africa but hold them in international custody in London or New York and perhaps wish to trade them on international securities markets such as London Stock Exchange or New York’s NYSE Euronext. They would choose to hold their equities in the form of Depositary Receipts, usually known as “American” (ADRs) if issued in the US, “Global” (GDRs) in London and there are DRs in several other countries including South Africa (SADRs).
The idea is that shares listed on an international exchange are transferred to a strong financial institution, who then issues a DR security which can be more easily traded on an international exchange or over-the-counter (OTC) market. BNY Mellon dominates the field but other issuers include JP Morgan Chase, Citi and Deutsche Bank. The total value of DRs traded in 2010 worldwide was $3.5 trillion, up 30% on 2009, and 89% of this trading was in the US.
Michael Cole-Fontayn, CEO of BNY Mellon Depositary Receipts (www.bnymellon.com), explained to African Capital Markets News that when institutional investors request, either for a capital raising or for more trading, BNY Mellon approaches the company and other stakeholders to set up a DR programme, usually under English or New York law. The details of the new DR security, including its currency, can be adapted to suit the international investors.
BNY Mellon holds the underlying security in the local market through a custodian, usually Standard Bank, while the newly issued DR clears and settles through the usual international clearing houses. An investor who has bought the shares in the local market can also approach BNY Mellon to convert them into DRs, which are often cheaper to own and easier to trade and settle.
When an investor holding a DR wishes to sell, he may first look for an international buyer for the DR. If not, his broker can find a buyer in the home market, then BNY Mellon would cancel the DR and deliver the shares for settlement in the local market. This can be done overnight if there is a time difference, but cancellation was suspended for Egyptian DRs when the Egyptian Exchange closed for two months in January-March 2011.
BNY Mellon currently offers DRs in shares in South African, Nigerian and Egyptian companies and offers indices based on the DRs. South Africa’s Anglogold Ashanti raised $705m through issuing DRs in New York in September 2010. Egypt’s Orascom Construction and Remco Tourism Villages created DR programmes for the US OTC markets, while Orascom Telecom traded $1.8bn of DRs on the LSE’s International Order Book (IOB) market. Four African companies – Malawi’s Press Corp, two Nigerian Banks and media house Naspers of South Africa – have GDRs listed on the LSE’s Main/Professional Securities Market.
Mary Gormley, Vice President at BNY Mellon Depositary Receipts, said that one big advantage was the speed of clearing and settlement and reduced costs. For instance, Oando plc, listed on the Nigerian Stock Exchange then cross-listed on the JSE in 2005. Movements between share registers could take 40 days, while equivalent changes using the DR system would be much quicker. She believes the DR programme will grow, with growth businesses in Kenya and Ghana interested and Senegal, Togo and Zimbabwe also considering it: “DRs come out of a need for capital raising.”

Standard Chartered starts taking over Barclays custody services

Standard Chartered Bank in Kenya (www.standardchartered.com/ke/en/) is to issue KSh 2.5 billion ($30.2 million) in new shares in order to buy the custody business of Barclays Bank of Kenya, according to a Reuters report. Chief Executive Officer Richard Etemesi said the total cost of the transaction was KSh 1.9 billion ($22.7 million) and other proceeds will go into expanding the bank’s ordinary business. The new shares will raise Standard Chartered’s authorised share capital to KSh 1.78 billion from 1.365 billion.
On 27 April the bank announced that it had agreed to acquire the African custody business from Barclays Bank PLC. The acquisition is subject to certain regulatory and other approvals, and is expected to be completed this year. The African custody business forms a key part of Standard Chartered’s widening network of of international custodian services, alongside existing capability in Asia and the Middle East. The Africa-wide acquisition adds direct custody capabilities in 8 African markets (Botswana, Ghana, Kenya, Mauritius, Tanzania, Uganda, Zambia and Zimbabwe) and indirect capabilities in a further 8 markets (Egypt, Cote d’Ivoire, Malawi, Morocco, Namibia, Nigeria, Tunisia and South Africa) through a network of third-party sub-custodians via an operations hub in Mauritius.
Commenting on the deal Karen Fawcett, Group Head of Transaction Banking at Standard Chartered, said: “We are very pleased to have secured the acquisition of Barclays’ African Custody business. This deal will enable Standard Chartered to rapidly develop our custody capabilities in our core markets across Africa. We are already seeing ongoing demand for regional and international investment services across this region. Standard Chartered remains committed to providing clients with an integrated set of solutions that promote ongoing growth of this industry. With this acquisition, we will enhance our custody offering and continue to gain a strong foothold as core bank to our clients in Africa.”
The new business will strengthen Standard Chartered’s regional product offering for both international and regional businesses, strengthening client relationships, whilst providing an additional source of liquidity to the Group.
The Reuters report cites Etemesi as saying the deal will be particularly important for Asian investors looking for returns in the African market: “One rationale behind the acquisition of the custody business is to give our Asian customers opportunity to invest in African capital markets.” He said revenue from the business should be about KSh 1 billion ($12.5 million) by the end of 2012, from about KSh 600 million currently.
According to the bank’s website, it is the oldest foreign bank in Kenya (established 1911) and has over 1,000 employees, 32 branches and 27% market share. In March the bank announced that it had increased pre-tax profits for the year ending December 2009 by 43% to KSh 6.7 billion. Revenues grew by 22% to KSh 12.4 billion while expenses grew by only 3%; loans and advances to customers grew by 31% to KSh 56.7 bln while customer deposits grew 13% to KSh 86.8 bln. In 2009, the bank invested heavily in technology anticipating that it would be the main driver for business growth in the banking sector in future, including in systems infrastructure and technology-based products and services as well as standardising technology platforms to become more nimble and able to anticipate and respond to the changing business environment.
The rights issue and the acquisition are subject to regulatory approval.