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How has the FMA changed the out-and-out cession of uncertificated securities?


Historically, if one wanted to use securities as a way of securing an obligation (for instance, using securities as collateral to secure an exposure), one had to create a pledge and cede the securities to the secured party. This was because securities were seen under common law as personal rights, and the only valid method of transferring personal rights was via a pledge.


This was constraining in the South African market, as it meant that all the formalities of creating a pledge and holding the securities in a segregated account with no right of use, had to be adhered to. As a result, most market participants used cash as collateral (as cash is fungible and tangible and can validly be transferred outright in ownership).


With the new regulatory requirements pertaining to variation and initial margin for OTC derivatives proposed under the Financial Markets Act (FMA), there will be an increased use of collateral. The SA market was concerned about a liquidity strain being experienced if there was no valid method to transfer ownership in non-cash assets, and permit rehypothecation of those non-cash assets.


As a result, the FMA included a new section 38 which provides for the transfer of title and ownership (out-and-out cession) in securities and sets out the legal requirements to achieve a valid and legally-binding transfer. One of the requirements of section 38 includes a debit and credit entry into the securities register to show who the securities are transferred to and from, in order to maintain an audit trail.


Section 39 of the FMA restates the common law pledge method of a cession in securitatem debiti to permit pledges if parties so wish to retain this method of pledging securities. A valid cession in securitatem debiti requires that entries in respect of pledges and cessions should be effected by statutory flagging at the level of holding and to make the entry effective to third parties in accordance with the provisions of the 2008 Companies Act. The FMA permits you to flag against a whole securities account making it administratively easier than the Companies Act where each individual security had to be flagged.


What are the key differences between out-and-out cession & pledge or cession in securitatem debiti?


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