Chapter 1: Financial Institutions

Question 1

The Reserve Bank (the SARB) is South Africa’s central bank. The Bank assumes responsibility for:

Answer 1

• Formulating and implementing monetary policy in such a way that the primary goal of the Reserve Bank will be achieved in the interest of the whole community that it serves
• Ensuring that the South African money, banking and financial system as a whole is sound, meets the requirements of the community and keeps abreast of international developments
• Assisting the South African government, as well as other members of the economic community of southern Africa, in the formulation and implementation of macroeconomic policy
• Informing the South African community and all interested stakeholders abroad about monetary policy and the South African economic situation.

Question 2

• Banker and adviser to the government

Answer 2

o Banker to the government

o Administration of exchange control

Question 3

• Management of the South African money and banking system

Answer 3

o Provision of liquidity to banks
o Banknotes and coin
o Banker to other banks

Question 4

• Formulation and implementation of monetary policy

Answer 4

o Money and capital market operations

o Gold and foreign exchange reserves

Question 5

• Regulator of the banking system and in particular to provide:

Answer 5

o Prudential regulation of banks

o Systemic oversight.

Question 6

Bank Monetary Policy Committee

Answer 6

The Bank Monetary Policy Committee, chaired by the Governor of the Reserve Bank, meets once every two months. After the meeting it releases a statement on monetary policy, including declaring Repurchase Rate (the repo rate) - the official interest rate that the Bank uses in its dealings with commercial banks

Question 7

primary objective of monetary policy

Answer 7

“The primary objective of monetary policy in South Africa is to achieve and maintain price stability in the interest of sustainable and balanced economic development and growth. Price stability reduces uncertainty in the economy and, therefore, provides a favourable environment for growth and employment creation.” The Bank has set its target inflation rate as being between 3 and 6%.

Question 8

The Johannesburg Stock Exchange (JSE) has two key roles:

Answer 8

1. Raising new finance for companies and governments (the primary or new issue market) through Initial Public Offerings (IPOs)
2. Providing a secondary market for investors.

Question 9

The JSE brings together lenders and borrowers. Some of the main lenders are:

Answer 9

• Retirement funds
• Long-term insurance companies
• Individuals
• Short-term insurance companies
• Collective investment schemes
• Investment companies and trusts.

Question 10

2.2. Securities dealt on the JSE

Answer 10

The JSE deals primarily in equities and fixed interest securities as well as in a wide range of derivative products. It does not deal in money market transactions, nor does it cover foreign exchange transactions, though it does trade currency derivatives.

Question 11

The JSE connects buyers and sellers across a number of market platforms.

Answer 11

• Equity products, including warrants and ETFs among others, are offered on the Main Board and the AltX, the alternative exchange for smaller companies.
• The debt market covers Government Bonds, Corporate Bonds, and the Repo Market. It includes the old BESA (Bond Exchange of South Africa) which the JSE bought in 2009.
• The derivatives market includes Bond, Interest Rate, Equity, Commodity (including agricultural and energy) and Currency derivatives. It includes the old SAFEX which the JSE acquired in 2001.

Question 12

JSE Regulating the market

Answer 12

The JSE is governed by the Financial Markets Act, No. 19 of 2012, the JSE Rules and Directives and the Financial Intelligence Centre Act, No. 38 of 2001, through which it is given responsibilities as a market regulator.

Question 13

Merchant banks specialise in assisting organisations to capitalise their business. The roles played by a typical merchant bank are to

Answer 13

• Give advice on takeover and merger strategies and defences.
• Give advice on investment projects.
• Give advice on black economic empowerment projects.
• Give advice on the best ways to raise capital.
• Act as issuing houses.
• Arrange underwriting of new issues.
• Facilitate private equity transactions.

Question 14

As a result, concern has been expressed that fund managers have become too influential in determining asset allocation and the direction of capital, and the real value of “active” investment versus “passive” index-tracking funds is currently getting some media attention.

Issues cited include:

Answer 14

• herd-like behaviour
• excessive focus on short-term results
• closet “passive” investment (while charging “active management” fees)
• insufficient attention to corporate governance issues
• insufficient allocation to “new” asset classes (such as private equity/venture capital)

Question 15

• Defined benefit:

Answer 15

The member’s pension is determined by a specific formula. Members contribute to the fund at a set rate and the employers make up the difference required to finance the benefits (the “balance of cost”)

Question 16

• Defined contribution:

Answer 16

There is a set rate of employer and member contributions, paid into members’ individual funds. The pension payable is determined by a) the size of the fund and b) annuity rates at the date of retirement.

Question 17

There are two key characteristics of short-term insurance business that are relevant to their role in investment markets:

Answer 17

• Short term: Almost all policies provide cover for one year, and most claims are settled within a few months or a year or two.
• Variable claim amounts and number: Short-term insurers are vulnerable to catastrophes (for example, severe storms or a large mining disaster) which can result in a large number of claims and/or very large payments.