Presentation to the SCoF - PowerPoint Presentation

1. Presentation to the SCoF14 September 2022Jeanne Stegmann

2. Limitation on re-use of collateral 2021 TAACollateral dispensation introduced in 2016 Non-cash collateral transferred outright on a tax neutral basis No STT, income tax / CGT (same as a pledge of collateral) Outright transfers are more beneficial to pledges Realised immediately by lender to recover losses, where borrower defaults Lenders (collateral takers) can re-use collateral for any purpose provided collateral is returned to the borrower before expiry of 2 years. Lender re-uses collateral for:Realising collateral in the event of the borrower’s defaultRegulatory compliance – typically through interbank / SARB repo’s - HQLA/LCR ManagementLEX Management Securing overnight cash funding (inter-bank or with the SARB)On-post that collateral under unrelated transactions requiring collateral such as further debt transactions or meeting margin requirements under derivatives transactions. Collateral optimisation – where collateral is pooled and managed centrally, excess collateral may be repurposed for any of the above transactions. Re-use, as a mechanism to promote market liquidity, was a major driver for the dispensation - increased importance with the introduction of the requirement to post additional collateral due to variation margining (2023)

3. Limitation on re-use of collateral 2021 TAA2021 TAA - effective date: 1 January 2023DTLAB 2022 – does not make amendments and thus 2021 legislation stands Limits re-use:Further compliant collateral arrangementsSARB Repurchase/Resale agreementsRegulation 28 complianceSecuring overnight cash placement EM to the 2021 TAA - Reason for the amendmentTo clarify that any non-compliant use of collateral will trigger taxIndustry agrees with principal, but the drafting of the 2021 TAA does not achieve this as it affects prior compliant collateral arrangements in a collateral chain, thus undoing the dispensation in the event of non-compliant use. Unless drafting is corrected, it renders the collateral dispensation unusable - pledge or cash collateral likely to be more attractive

4. Limitation on re-use of collateral (continued)Industry viewsIndustry agrees that if collateral obtained under a complaint collateral arrangement, is re-used by the lender for non-compliant purposes, tax must be triggered on the non-compliant re-use. The 2016 legislation adequately addresses this – no need to clarify Should clarification be required, a proviso to the legislation be included to clarify the triggering of tax for non-compliant useThe 2021 legislation now limits re-use to a narrow permissible listRe-use of collateral outside of this list will render all prior collateral arrangements non-compliant and undo the dispensation available to prior collateral arrangements in a chain of collateral arrangements.

5. Limitation on re-use of collateral (continued)Proposed solutionPostponement of the effective date to 1 January 2024 to allow for further industry consultations with regards to:Re-use being the primary objective in lobbying the legislation prior to its introduction in 2016Why re-use should not be restricted Non-compliant re-uses result in tax and should not taint prior compliant collateral arrangements in the same collateral chainPerceived abuse and how this can be addressedProposed amendments (if any) that align to achieving market liquidity and stability Considering re-drafting the 2021 legislation as a proviso as opposed to an exclusion and removing the list of permissible re-useQuestions?