4.6. South African institutional investors (Capital Transfers)

(a) Institutions eligible for the foreign portfolio investment allowance

Pension funds registered under the Pension Funds Act; life insurers licensed under the Insurance Act to conduct life insurance business with a distinction between non-linked business, i.e. the underwritten policy business other than individual and fund investment linked business and linked business, i.e. individual and fund investment linked business; CIS managers registered under CISCA to administer collective investment schemes; and discretionary financial services providers authorised under the FAIS Act registered with the Financial Surveillance Department as institutional investors. A discretionary financial services provider means a Category II and IIA financial services provider authorised in terms of the FAIS Act are treated as institutional investors.

Institutional investors are eligible for the foreign portfolio investment allowance and must comply with the reporting requirements as outlined below.

Discretionary financial services providers may elect to register with the Financial Surveillance Department as an institutional investor. Registration is required for all discretionary financial services providers wishing to invest and/or manage funds offshore in respect of retail as well as institutional assets. For discretionary financial services providers to register with the Financial Surveillance Department as an institutional investor, it must be authorised by the Financial Sector Conduct Authority as a discretionary financial services provider.

For an authorised user, excluding an external authorised user, (as defined in the Financial Markets Act) to register with the Financial Surveillance Department as an institutional investor, it must in addition to the registration with a South African exchange also be authorised by the Financial Sector Conduct Authority as a discretionary financial services provider.

Discretionary financial services providers who elect not to register as institutional investors with the Financial Surveillance Department, are treated as intermediaries.

Discretionary financial services providers are required to declare their status regarding registration with the Financial Surveillance Department when they invest with another domestic institutional investor.

(b) The distinction between institutional assets and retail assets

The reporting procedure requires that a distinction be made between institutional assets under management and retail assets under management.

(aa) Institutional assets refer to assets held or managed on behalf of other institutional investors.

(bb) Retail assets refer to assets received from, e.g. individuals and other entities such as companies, trusts and include assets received indirectly through an intermediary, such as an administrative financial services provider, nominee company or a discretionary financial services provider not registered as an institutional investor with the Financial Surveillance Department. All assets sourced from an intermediary identified as retail assets applicable to the underlying retail client should be included as retail assets in the quarterly asset allocation report of the reporting institutional investor

(aa) The foreign exposure of retail assets may not exceed:

45 per cent in the case of pension funds; the linked and non-linked business of life insurers; CIS managers; and discretionary financial services providers registered as institutional investors with the Financial Surveillance Department. The combined exposure, i.e. offshore and African, should not exceed the prudential limit of 45 per cent of retail assets under management.

(d) African allowance

The African assets can be acquired as follows:

(aa) directly by acquiring foreign currency denominated portfolio assets in Africa through foreign currency transfers from South Africa. A collective investment scheme in South Africa sanctioned by the Financial Sector Conduct Authority is preferred in instances where the institutional investor wishes to obtain direct African exposure by means of a pooling arrangement (e.g. an African fund set up specifically by a managing institution);

(bb) indirectly by acquiring approved inward listed debt instruments listed on a South African exchange and classified as ‘African’.

(cc) indirectly, on application to the Financial Surveillance Department through an Authorised Dealer, through a foreign registered fund mandated to invest into Africa. The foreign registered fund should be mandated to invest at least 75 per cent of funds under management into Africa. A copy of the mandate or prospectus must accompany such application; or

(dd) indirectly, on application to the Financial Surveillance Department through an Authorised Dealer, through investments in instruments issued by African entities that are listed on non-African exchanges to raise funds earmarked for use in Africa.

(e) Reporting requirements

All institutional investors should submit the following to the Financial Surveillance Department:

(aa) Quarterly asset allocation report

All quarterly asset allocation reports must be submitted within two months of the end of the calendar quarter to the Financial Surveillance Department either through an Authorised Dealer or via bulk or single direct reporting, irrespective of whether the institutional investor has offshore exposure.

In reporting on asset allocations, the ‘look-through’ principle is applied to investments in collective investment schemes, life insurance policies and other investment products. This principle ensures the consistent classification of foreign exposure, whether acquired directly in foreign currency or indirectly through a domestic intermediary. For instance, a pension fund holding foreign equities through a collective investment scheme registered locally should record such an investment as a Rand denominated foreign asset.

Managing institutions that manage assets on behalf of other institutional investors are required to report the asset allocation of such funds or policies to the originating institution as at the end of each calendar quarter within 15 working days of each calendar quarter end. This information is necessary to enable the originating institution to ‘look-through’ to the underlying assets in compiling its quarterly reports.

Managing institutions are required to provide, as part of its quarterly asset allocation report, an updated list of all their current institutional investors registered with the Financial Surveillance Department.

Life insurers, CIS managers and discretionary financial services providers, are required to submit quarterly asset allocation reports of their asset holdings according to the major asset classes as at the end of each calendar quarter. The quarterly report needs to reflect the allocation of retail assets and institutional assets under management, separately.

In the case of pension funds, the section 13B administrators, i.e. pension fund administrators as appointed in terms of section 13B of the Pension Funds Act, must submit quarterly asset allocation reports for each fund under their administration, unless otherwise instructed by the pension fund. The quarterly report relates to the allocation of total assets of the respective pension fund.

(f) Information required from institutional investors in excess of the foreign portfolio investment limit

(aa) In cases where the prudential limit has been exceeded, the institutional investor must as part of the quarterly asset allocation report provide:

an explanation for the over-exposure; and
a clear indication of how and by when they intend to adjust the foreign exposure to fall within the applicable limit. See (vi)(r) above regarding further offshore investments if an institutional investor has exceeded the prudential limit.

(g) Audit requirements

(aa) An institutional investor, with total portfolio assets at fair value in excess of R6 million, directly or indirectly, will also be required as part of its financial year-end audit to obtain an audit report from its external auditors assessing the institutional investor’s quarterly asset allocation reports.

(bb) The audit reports must be submitted to the Financial Surveillance Department within a maximum period of six months after its financial year-end either through the institutional investor’s Authorised Dealer or by sending an email to sarbportfolio@resbank.co.za.

(cc) The formats of the audit reports may be downloaded from the South African Reserve Bank’s website: www.resbank.co.za, by following the links: Financial Surveillance>Institutional-Investors>audit report.

(h) Reporting format

To register for online submission of the quarterly asset allocation report an institutional investor must submit an email message to:

sarbportfolio@resbank.co.za, specifying the wording: “Request for online registration” in the subject field.

Subsequently, the interactive web-page may be accessed from the South African Reserve Bank’s website: www.reservebank.co.za, by following the links: Home > Regulation and supervision > Financial surveillance and exchange controls > Online Services > Electronic Submission of Asset Allocation Reports.

In addition, technical specifications enabling retirement fund administrators to report electronically in bulk format have been developed. Retirement fund administrators wishing to make use of this facility must submit a request by sending an email message to sarbportfolio@resbank.co.za, specifying the wording “Request for bulk reporting specifications” in the subject field.

On receipt of the request, the retirement fund administrator will be assisted with the development of an interface to facilitate bulk reporting on behalf of retirement funds.

(i) Compliance

Institutional investors exceeding the permissible foreign portfolio investment limits are required to provide an explanation for the contravention and to propose corrective measures as part of the quarterly reporting requirements.

The Financial Surveillance Department will consider the reasons for the contravention and the proposed corrective measures. If these measures are deemed to be unacceptable, the Financial Surveillance Department will issue further directives that may include the repatriation of income and/or capital.

An institutional investor shall comply with the Regulations, requirements as outlined in the Authorised Dealer Manual, specific authorities granted as well as any other requirements or conditions as may be stipulated from time to time by the Financial Surveillance Department.